The Trilemma of Luxury Brands, Selective Distribution and Competition: An Indian Perspective

[Anmol Ratan is a fourth-4th year law student at National Law School of India University,  Bengaluru]

From high-end haute couture fashion houses of Dior and Chanel to premium automobile brands of Rolls Royce and Porche, it is evident that luxury brands are manifesting their presence in various emerging global markets, and India is no different. With the advent of liberalisation and globalisation over the past few decades, many luxury brands such as Philipp Plien and Billionaire are now treading their way into the Indian markets, seeking to carve out a secure niche for themselves in a nation that houses an ever-growing clientele of multi-millionaires and billionaires

While the dynamicity of the luxury landscape has been well embraced by closet consumers and indulgent lifestyle enthusiasts in India, there is more to it than what meets the eye. Fuelled by stiff domestic and international competition and edged by the rise of e-commerce and the perils of counterfeits, luxury brands have never been this incapacitated. Evidently, there are varied points of law that arise out of the functioning of luxury brands,; however one of the most infamous one is the tool of selective distribution systems (henceforth referred to as SDS), especially in the context of competition law and antitrust. By evaluating the special position of luxury brands and selective distribution in the realm of Indian competition law, the author claims that while SDS prima facie may not explicitly exhibit anti-competitiveness (due to the sheer lack of appreciable adverse effect on competition (AAEC) ), it does possess latent anti-competitive potential from the Indian legal standpoint. 

SDS is a mechanism by which luxury brands undertake sale of goods and services only to those distributors that the suppliers have pre-selected. It can be undertaken as a territorial restriction or a customer restriction or even both. While SDS as a market phenomenon has been omnipresent in international luxury trade, it somehow does not find a statutory mention or reference in transnational competition law or anti-trust doctrines. Even with the absence of any posited law on SDS, its legality has been time and again upheld in the global context, on the grounds that it is deemed necessary to preserve and sustain the luxury image of the brand. In a judgement of the European Court of Justice in Coty v. Perfumerie AkzenteSDS used by Coty (a German luxury perfume brand) sustained judicial scrutiny for being primarily designed to preserve the ‘aura’ of the said luxury brand. The European Court also held that as far as brands use and apply an objective and uniform  criterion for selective distribution, SDS will be within the legal boundaries of the Treaty on the Functioning of the European Union in particular and the anti-trust doctrine in general. Similarly, in Keerthy Krishnan v. Bharat Petroleum Corporation Limited, the Competition Commission of India (CCI) upheld the validity of SDS by justifying it based on primacy of commercial wisdom and liberty of the enterprise to make their own decisions in regards to their trade. 

Indian Competition Law and SDS

Examining SDS from the Indian legal viewpoint, it is most likely to be assessed under the ambit of section 3(4)(c) & (d) of the Competition Act, 2002, provisions mandating for exclusive distribution agreements (EDA) and refusal to deal respectively. According to the Act, such agreements are not necessarily held to be anti-competitive, unless ‘they cause or are likely to cause [AAEC]’. AAEC is a statutory standard that is evaluated on the basis of factors (as laid down in section 19) such as barriers to entry, market foreclosure, driving out of market players, accrual of benefits to consumers and promotion of development. With core features of exclusivity, distinction and high-quality which are imparted by premium pricing, luxury brands tend to cater to a small part of an extremely diverse consumer population in India. Even with tremendous growth that the Indian luxury market has witnessed over the past few years, it is argued that luxury brand’s reach and consumer base has been limited to the countable ‘super-rich’ and the new emerging class of high-earners, not rich yet (HENRYs). It may be due to the sheer lack of numbers in footfall and actual consumers that even geographically such high-end brands have not been able to locate themselves beyond metropolitan hubs of New Delhi and Mumbai

The presence of luxury brands in India, or its lack thereof, also hints at the categorical growth of the luxury market. Thus, while on the one hand Reliance and Future Retail have about 2000-10000 functioning stores across the nation, on the other hand, luxury brands such as Louis Vuitton (first brand of its kind to enter Indian market in the early 2000s) still has only five operational stores pan-India. Consequently, it may not be inexact to argue that at present the current bundle of luxury brands are incapable of creating entry barriers, driving out competition or foreclosing the Indian market which are some of the  prerequisites to establish AAEC. Thus, even with their inclination towards the practices of SDS and refusal-to-deal, luxury brands may not yet be anti-competitive in the eyes of the Indian law. The prima facie assessment seems to suggest that the position of luxury brands is securely held in position, although it is argued that SDS is still a very potent site for a legal conundrum. 

SDS and the Anti-Competitive Future of Luxury Market

Evident from the voluminous scholarship on brands and brand theory, the definition of luxury brands remains historically unsettled. With no succinct definition of brand and its correlates, maintaining an objective standard and position is bound to become a difficult legal and policy undertaking. By allowing luxury brands such as Coty to use SDS and refusal-to-deal for the mere sustenance of their brands image and aura, the courts and the law seem to be myopic to the potential precedential predicaments such reasoning may engender. Presuming, however not conceding, that SDS are important for brand image, most brands, if not all, may claim to be as subjectively luxurious as others, and thereby legitimise their practices of selective distribution and refusal to deal, be it territorial or customer based. Even if there is a requirement to have an objective criterion to select distributors or customer (as postulated in the Metro case), every firm, company and brand can formulate one in lieu of continuing their respective selective distribution practices. Furthermore, if such margins and leeway are granted to only high-end brands of luxury, every other brand would strive to attain the tag of luxury, making the very concept ‘luxury’ redundant, if not completely obsolete. By alleviating the risks of reduced intra or inter-brand competition and market partition, SDS may even lead to unfair price discrimination. It may also tie up the traders with their respective brands in a way that would potentially foreclose the market of luxury for any other brand that may desire to be luxurious and high-end.  

Conclusion and Recommendations

With the ever-growing market of luxury in India and its pervasiveness, it is crucial for the law to examine the luxury landscape in a new fashion. While the author recommends a contextual and fact-based analysis in such cases, it is important to define the terms of luxury to a certain extent. Certain criteria such as nature of products and services, market and its share, primary clientele, sector, prices, global standing, and revenue can be used to evaluate the luxury quotient of a brand for the purposes of competition law. Additionally, contrary to the current view of assessing luxury market as a singular all-inclusive space, one recommendation is to distinguish the markets of distinct products and services in order to evaluate the pertinent issues of dominance and anti-competitiveness comprehensively. One cannot ,and should not, consider luxury wine and handbags to be a part of the same market field. While it is true that luxury product purchasing is not just transactional, as long as it takes place in a market, it has to be bound by the rules of competition. 

– Anmol Ratan

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