1. Selective distribution: the regulatory and jurisprudential context.

Based on the assumption that the goal of every manufacturer is to maximise its profit, there are cases in which this goal can only be achieved by restricting access to the official sales network to distributors and resellers with special requirements, so as to protect the image of excellence and product quality.

This tends to be the case for technically complex products - for which customer service is particularly important - and the manufacturer believes that the certainty of an adequate service can positively influence the purchaser's choices, or in the case of beauty or fashion products, where the protection of the product's image or prestige may be considered essential in order not to dissuade the consumer from purchasing a product that is offered together with goods of much lesser value.[1]

Here is the manufacturer's interest in creating a selective distribution within which, each authorised member undertakes to sell the contractual goods or services only to distributors selected on the basis of predetermined criteria, in order to safeguard, in the consumer's perception, the aura of exclusivity and prestige of the products, thanks precisely to a presentation of the goods to the public that enhances their aesthetic and functional specificity.

Although selective distribution is abstractly capable of restricting competition on the market (thus contrary to theArticle 101(1) TFEU), it is nevertheless regarded as a legitimate selling method (pursuant to Article 101(3) TFEU) provided that:

  1. the characteristics of the products actually require a selective distribution system, in view of their high level of quality and technologyin order to preserve their quality and ensure their proper use;
  2. the choice of dealers is made according to objective criteria of a qualitative nature, established indiscriminately for all potential resellers and applied in a manner non-discriminatory;
  3. the system proposes a result apt to improve competition and thus counterbalance the restrictions on competition to the same;
  4. the criteria imposed do not go beyond what is necessary.[2]

Under these conditions, therefore, a selective distribution system is permissible.

The first and main advantage (linked in fact to the very essence of selective distribution itself) is the fact that in such a system, the manufacturer may oblige those belonging to the network and, therefore, bound to it by a contractual relationship, not to promote sales to parties (other than end users) not belonging to the network (Art. 4(b)(iii)), subject however to the possibility of sales cross between authorised members (Art. 4(d)).[3] Therefore, in the event of a breach of contractual obligations, the manufacturer will have the possibility of retaliating against the non-performing member by resorting to the remedies typical of breach of contract.

- Read also:  Selective distribution. A brief overview: advantages and disadvantages.

On the other hand, as far as relations with parties outside the network are concerned, with whom the producer by definition has no contractual relationship, it can now be affirmed without hesitation that the producer has the right to seek injunctive relief against the parallel distributorsif, and only if, the manner of resale is such as to damage the image of luxury and prestige - which the manufacturer seeks to defend precisely by adopting a selective distribution system - or if there is a confusing effect as to the existence of a commercial link between the proprietor of the trade mark and the unauthorised reseller.

As is well known, thearticle 5 c.p.i. - which in its first paragraph lays down the so-called principle of exhaustion, in its second paragraph provides for an exception, stating that the holder of an industrial property right may, if there are legitimate reasons, oppose the further commercialisation of its products already on the market, in particular if their condition is changed or altered; it is now common ground that selective distribution falls within this exception.[4]

- Read also:  Parallel Sales in the EU. When and to what extent can a manufacturer control them?

The application of these principles to sales onlineThis has led to the consolidation of a guideline that considers unlawful, as constituting a serious restriction of competition, a contract that absolutely prevents the sale via web[5] and that a restriction on the distribution online would only be lawful if it aimed to make authorised dealers of a selective system comply with certain quality standards with the main purpose of safeguarding the image of the contractual products.

- Read also: Can a manufacturer prevent its distributors from selling online?

Given that online sales have been de facto 'cleared' by European jurisprudence, albeit with the limitations mentioned above, a further issue has arisen, namely whether parallel distributors can also claim the right to make sales via web. A recent judgment of the Court of Milan - applying the principles already well established in the field of 'traditional' sales - held that in relations extra-contractualthe proprietor of exclusive property rights, may only block sales to persons outside the selective sales network if there is actual prejudice to the luxury or prestige image of the trade mark, thus affirming that the failure to distinguish by a maerketplace (in this case amazon.co.uk) between luxury and inferior products can confuse the consumer and damage the prestige of the brand.[6]

2. The case Shiseido v. Amazon.

With order of 19 October 2020 (currently the subject of a complaint), the Court of Milan again confirmed its orientation, upholding the appeal brought by the licensees of trademarks including "Narciso Rodriguez" e "Dolce & Gabbana" for the manufacture and marketing of perfumery and cosmetics products, preventing 'amazon.it' from promoting and offering for sale products bearing its trademarks, which are the subject of selective distribution agreements.

The Court of Milan, in order to verify the existence of the fumus boni iurisIt established the existence of the following three requirements:

  1. if the products in question could qualify as luxurious;
  2. if the selective distributionof the applicant was legitimate;
  • if the off-network sale would bring an effective damage to the reputation of the trade mark.
2.1. Ascertaining the luxury category of products.

The examination of this requirement was carried out, in this case, on the basis of quality indexes, finding, with reference to the trade marks 'D&D' and 'Narciso Rodriquez':

"the search for high quality materials, the care for packaging [...], the public presentation promoted at publicity level by personalities from the entertainment industry, the wide accreditation in the sector of reference deducible from [...] awards obtained, the consolidated recognition by the specialised press".

The Court, on the one hand, held that such serious, precise and concordant evidence, pursuant to Article 2729 of the Civil Code, proved that such fragrances belonged to the high-end category (reserving the right to conduct a more detailed investigation at the merits stage) and, on the other hand, again using the same indices and parameters of assessment, declared that the aura of luxury had not been sufficiently proven with reference to the marks "Iseey Miyake", "Elie Sahh" e "Zadig&Voltaire', thus placing these fragrances in the high-end category.

2.2. Verification of selective distribution contracts.

After verifying the aura of prestige of the products in question, it was necessary to verify the actual existence of selective distribution.

According to European case law, in order to benefit from the exemptions of Article 101(3) of the Treaty, it is not sufficient that a manufacturer has made a significant promotional effort in favour of high-end products, but also the conclusion of agreements that effectively impose on other independent economic operators obligations restricting their freedom of competition, since, otherwise, each manufacturer could justify the use of a selective distribution system only on the basis of the promotional activities carried out, so that any restrictive infringement criterion would be justified by the fact that it was necessary to protect the marketing strategy desired by the manufacturer.[7]

Moreover, once the existence of a selective distribution system has been verified, according to a recent orientation of the Court of Appeal of Milan, the producer may only claim the advantages deriving from it, and thus derogate from the principle of exhaustion, if, in application, the existence of an effective vigilance exercised on the market by the manufacturer.[8]

In the present case, the Court analysed the clauses of the contracts and verified that the obligations imposed on authorised dealers appeared to be aimed solely at protecting the luxury aura of the trade marks, having been applied "objective, qualitative, non-discriminatory criteria proportionate to the luxury character of the products distributed" and therefore "confirms the regulatory and jurisprudential principles cited'.

In particular, limitations on brand and sign positioning, sales and advisory service, sales methods, use of advertising material, qualification of sales personnel and customer care were deemed appropriate.

The contracts provided for further restrictions on how sales could be made via internet, as only authorised dealers are allowed to carry out such activities. availability of at least three physical points of sale and only after specific authorisation by the licensee, who, once the admission procedure had been activated, still had to set up and operate the site in accordance with the contractually imposed standards (graphical quality of the site, quality space dedicated to competing luxury products of the same level, absence of products other than perfumery or beauty products).

The General Court held that the limitations imposed by Shiseido on its authorised retailers, including making the use of e-commerce conditional on the availability of at least three physical points of sale, did not appear to go beyond what was necessary, in view of the fact that (with reference to the requirement of physical points of sale) the same is admitted by the European Commission itself in paragraph 54 of the Guidelines of the Exemption Regulation.

2.3. Brand reputation bias.

The last element to be ascertained by the Court, which is necessary for the application for an injunction to be granted, is the existence of a concrete injury to the holder of the patent rights, since it is not sufficient to merely note the circumstance that the unauthorised seller does not comply with the standard imposed on authorised dealers.

Indeed, case law requires that the specific manner of sale must concretely damage the prestige of the trade marks in order for the proprietor to prevent the unauthorised reseller from further resale.[9]

For the purposes of the injury determination, Amazon was challenged:

  • the absence of physical shops (relevant for the products in question, i.e. fragrances and cosmetics, also for possible allergy testing of products),
  • the lack of a customer service concept similar to that provided in the real shop with the presentation of a capable person,
  • the combination of the perfumes in question with other heterogeneous, non-luxury products (toilet paper, insecticides),
  • the presence of advertising material of products of other brands, even of lower market segments, on the same Internet page where the perfumes in question are present.

Of particular interest is the fact that the General Court thus held that it was not so much the fact that other, even non-luxury products were sold within amazon that was decisive, but rather that in the same virtual space (web page), heterogeneous goods were presented, thus applying a well-established orientation of European case law to the 'virtual'.

In particular, the European Court of Justice had confirmed the possibility for entities outside the network to sell contractual products in multi-brand shops (in this case a hypermarket), provided that the sign of the retailer does not devalue its luxury image and the sale is made in a reserved department or space in order to enhance the qualities of the products.[10]

Applying this principle to the virtual means, in practice, having to ascertain not only that the good is sold in a 'proper' manner, reserving a virtual space appropriate to its allure luxury, but also that it is promoted and sold on a marketplace or e-commerce whose signage does not devalue its image.

3. Amazon is an 'active' hosting provider

An element of absolute importance is the fact that the Court in this order established the nature of Amazon as an 'information society service provider' within the meaning of the Directive No. 2000/31/EC (on this point see also the legal nature of online platforms: the Uber and Airbnb cases) and, in particular, recognising that subject's role as an 'active' hosting provider in relation to the activity of managing its own sales portal, even where the same is limited to the provision of intermediation services, i.e. it does not carry out active sales activities within the site, but as a provider of services to third parties using the platform to promote sales.[11]

The Court, in particular, established Amazon's role as an 'active' hosting provider,[12] and as such not subject to the liability exemptions outlined by Articles 14, 15 and 16 of Directive 2000/31/EC, in view of the fact that the platform (i) '(i)manages the storage and shipment of products", (ii) "operates a customer service for third-party sales listings, which is the only service the customer has to interface with the seller", (iii) "is also responsible for promotional activity through advertisements on third-party websites" and (iv) "allows consumers to infer the existence of a link between Amazon"and the companies producing the products sold on the platform.

Read also - The hosting contract and the hosting provider's liability profiles.

4. Some reflections

The judgement that is the subject of this brief commentary now aligns with a well-established jurisprudential orientation that, in fact, reflects the reality of commerce today, namely a steadily increasing thinning between in-store shopping experience and online.

One can understand how the online distribution of luxury and high-end products will be less and less able to disregard the careful and rigorous care of sales methods and adhere more and more to strict standards that in physical shops are now taken for granted, not only from a legal point of view, but (above all) from a cultural point of view.

Indeed, it would not even be conceivable that a designer shop could sell a high-fashion dress together with a packet of toilet paper, which still regularly happens online, without causing such a stir for the consumer, who is perhaps more focused on the price and not on the online shopping experience.

This element will increasingly have to be taken into account by manufacturers in their sales strategies

Such a ruling, read a few years from now, will probably raise eyebrows, as a user cannot even imagine that within the same (virtual) shop a high-end perfume could be sold in the same manner and on the same page, together with liquid plumber.

[1] On the subject, Pappalardo, The Competition Law of the European Union, p. 405 ff, 2018, UTET.

[2] On this point see ECJ, 12 December 1996, Galec v. EC Commission, para. 16, ECJ, 13 October 2011, Pierre Fabre Dermo-Cosmetique, para. 41, EU Guidelines Reg. 330/2010, para. 175.

[3] In this regard, reference is made to what the Court of Justice stated in the case Metro-Saba IJudgment of 25.10.1977, at para. 27 ".Any sales system based on the selection of distribution points inevitably implies - otherwise it would make no sense - the obligation for wholesalers who are part of the network to supply only authorised retailers.

[4] Orders of 19 November 2018 and 18 December 2018 of the Court of Milan. with comment by Alice Fratti

[5] Court of Justice case, Pierre Fabre C-439/09.

[6] Court of Milan, 3 July 2019, with comment by RIVA, E-commerce and selective distribution agreements: the case 'Sisley v. Amazon', in Industrial Law, 1/2010, WoltersKluver.

[7] ECJ, 12 December 1996, Groupement d'achat Eduard Leclerc v. Cmmission, para. 111; see also Vichy v. Commission, judgment.

[8] Court of Appeal Milan, 25 November 2019, no. 5682.

[9] Court of Justice, 4 November 1997, Dior v. Evora.

[10] ECJ, 12 December 1996, Groupement d'achat Eduard Leclerc v. Cmmission.

[11] On this point, see also Traina Chiarini, Amazon is an 'active' hosting provider, according to the Business Court of Milan.

[12] To be contrasted with the passive hosting provider who, according to recital 42 of Directive 31/2000/EC, is to be qualified as such any service provider who does not exercise 'authority or control' and has a merely 'technical, automatic and passive role' and who 'neither knows nor controls the information transmitted or stored'.