Decision may mean retail arbitrage will no longer be legal in Europe

More than 2 million Americans make a full-time or part-time living selling merchandise on eBay, Amazon, Etsy and other online retail platforms.

For many smaller sellers, this activity takes the form of retail arbitrage: buying merchandise at retail from brick-and-mortar stores and then reselling it online for even more money. If you have ever been in a store and watched people (other than employees) scanning merchandise on their smartphone, that is what they’re doing.

Many manufacturers, wholesalers and retailers don’t care that their merchandise is being arbitraged online, but some manufacturers — especially those that make luxury goods — have been up in arms about this for decades.

Whenever you are branding merchandise as “exclusive” or “luxury,” you are implying that the merchandise is (A) high-quality, (B) produced only in limited quantities and, therefore, (C) hard to find. You can buy handbags just about anywhere women’s apparel is sold, but you can only find a Coach bag in certain selective retail locations approved by the manufacturer. The scarcity of the merchandise is what justifies a premium price — if it becomes available everywhere (on eBay or in dollar stores, for example), the luxury brand is diluted beyond recognition.

In the U.S., lawsuits by manufacturers trying to block online retail arbitrage of their merchandise have gotten nowhere. The U.S. Supreme Court in a 2013 landmark ruling — Kirtsaeng v. John Wiley & Sons, Inc. — said that retail arbitrage on eBay and Amazon does not constitute trademark or copyright infringement as long as the merchandise was acquired legally (i.e. it is genuine and not counterfeit).

The Kirtsaeng ruling left luxury-goods manufacturers with only one weapon left to fight retail arbitrage: adding clauses to their agreements with wholesalers and retailers that specifically prohibit them from reselling the merchandise online (except on their own company website).

Do such clauses violate antitrust laws because they unreasonably restrict competition or deny consumers freedom of choice?

We don’t have an answer under U.S. law as yet, but a recent decision by the Court of Justice of the European Union — the Supreme Court of the European Union, if you will — has come down squarely on the side of the luxury-goods manufacturers.

In this case (Coty Germany GmbH v. Parfumerie Akzente GmbH, decided on Dec. 6, 2017, text available online at http://curia.europa.eu/juris/liste.jsf?num=C-230/16), Parfumerie Akzente was an authorized distributor of Coty Germany’s luxury cosmetics. Its contract with Coty contained a clause that said, “the authorised retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an ‘electronic shop window’ of the authorized store and the luxury character of the products is preserved.” The contract also contained language expressly prohibiting the use of a different business name as well as the engagement of a third party to sell Coty products online that was not an authorized retailer of Coty products. Akzente was, among other things, allowing third-party sellers to post Coty products on Amazon’s German website.

Upholding the contract restrictions, the court found that neither the Treaty on the Functioning of the European Union nor the EU’s Block Exemption Regulation dealing with vertical restraints of trade between manufacturers and distributors (EU Regulation No. 330/2010, text available online at http://eur-lex.europa.eu/eli/reg/2010/330/oj) prevents contract clauses that prohibit authorized distributors in a “selective distribution system” for luxury goods from blocking sales on third-party platforms (such as eBay and Amazon), as long as it is laid down uniformly and not applied in a discriminatory fashion.

So what does this mean for U.S. based sellers of luxury goods on eBay, Amazon and other online platforms? While retail-arbitrage sellers posting items for sale on eBay’s or Amazon’s U.S. websites probably won’t be caught up by the EU ruling, sellers posting items on platforms that target customers in EU countries (such as www.amazon.de or www.ebay.fr) probably will, especially if the goods originated from a retail store, wholesale outlet or website based in the EU.

The case leaves open several important questions, such as the following:

  • Are EU-based retailers compelled to block third-party internet sales of luxury goods that occur without their knowledge or consent (as is typically the case in retail-arbitrage scenarios)?
  • Can internet sales be blocked if the goods originate from someplace other than a European-based retail store or website and, accordingly, there has been no breach of the manufacturer contract?
  • Will the U.K. follow the EU ruling after Brexit?
  • If the contract between a luxury-goods manufacturer and a retailer is governed by U.S. law, is that enough to avoid the Coty ruling?

One thing’s for certain: After this case, virtually every EU-based luxury-goods manufacturer will be including “no third-party internet sales” clauses in their contracts with retailers and distributors, including those based in the U.S. Will U.S. courts refuse to enforce them under the Kirtsaeng doctrine?

We’ll see … •

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author, and former host of the PBS television series “Money Hunt.” The opinions expressed in this column are those of the author.

© 2017 Clifford R. Ennico

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