Why Karl Lagerfeld went to Brussels

Hanne Melin, an associate in the Brussels office of Sidley Austin LLP, focusing on EU competition and IP law comments on new EU regulation about the selective distribution of luxury products on the internet.

In February this year, Competition Commissioner Neelie Kroes invited Karl Lagerfeld to Brussels. The purpose was to discuss an EU Regulation that governs how companies set up their retail systems. This Regulation expires next year and will likely be replaced by a new regulation. A question currently occupying the European Commission is whether the Regulation is sufficiently adapted to the internet and online selling. This question has triggered a much heated debate which some of the luxury companies are weighing in on.

Simply put, the EU Regulation at issue aims at providing legal clarity on what restrictions a manufacturer can lawfully impose on third-party distributors. Taking the example of a luxury company, it usually markets its products both through self-owned shops and with the help of third-party distributors appointed as part of a selective distribution system. The Regulation applies to the selective distribution system. Selective distribution means that distributors are appointed only if they satisfy certain criteria. In the case of luxury products, these criteria should seek to ensure that the products are sold in enhanced conditions in keeping with the products’ and the brand’s luxury aura. In this way, the luxury company can to some extent control how the products are resold; but this control is limited by the general requirement that these criteria must be objective, qualitative and applied in a non-discriminatory manner.

In principle, this also applies to the internet. The luxury company cannot generally prohibit its third-party distributors from using the internet to resell the products; it can impose qualitative criteria designed to ensure a satisfactory sales environment and service level. This has, however, proved difficult in practice. We all see how the internet changes our behaviour as consumers, and that presents a challenge to traditional business models: How do selective distribution translate to the internet? How do you combine controlled exclusivity with online openness? These questions essentially made Karl Lagerfeld travel to Brussels.

The debate is now held against the background of an extremely difficult economic situation. The Commission has responded by emphasising that EU competition policy should always serve the consumer interest. That suggests the Commission will largely be looking at the questions of distribution control and online selling from the point of view of how to maximise consumer benefits in terms of choice, quality and prices. I believe this means companies should take seriously the exercise of aligning company policy with the consumer-oriented agenda driving the Commission. Indeed, I think that is vital in order to ensure credibility in this debate and, going forward, compliance with the new regulation as well as with most other Commission initiatives.

Hanne Melin