Distribution Law

Selective distribution in France

In times of crisis, using selective distribution as a way of protecting a brand's image and profitability is increasingly frequent. However, setting up a selective distribution system is not always possible. Moreover, when it is possible, selective distribution is subject to restrictive rules.

Selective distribution consists, for the supplier, in selling its products only to distributors that are selected on the basis of specified criteria. These distributors commit not to sell the products to unauthorised distributors.

In France, selective distribution must comply with article 101 of the Treaty on the Functioning of the European Union (hereinafter the ?TUE?) and with article L420-1 of the French commercial code, which both prohibit agreements which have as their object or effect the prevention, restriction or distortion of competition. A refusal to sell to a non authorised distributor may indeed be considered as resulting from an agreement between the supplier and his distributors, which has a restrictive effect on competition between distributors for the same brand.

1. Type of products concerned by selective distribution

Constant, but rather old case law stated that agreements implementing a selective distribution system are not affecting competition when selective distribution is necessary due to the nature of the products. Concerning luxury brands or high tech products, it has thus been ruled that selective distribution is necessary in order to guarantee the quality of their commercialization and to protect the brand image. For example, selective distribution has been considered necessary for the sale of high tech clock-making products, computer hardware, electronic equipment and luxury cosmetics. But High tech products and luxury brands are not the only type of products which may be sold through a selective distribution network. Courts have, for example, considered that ceramic dinner services, jeans, and newspapers could also be distributed through selective distribution.

These principles are put in jeopardy by the fact that selective distribution agreements are not prohibited when the conditions for an exemption under the EU Regulation on Vertical Restrains are fulfilled. These conditions relate essentially to (1) not meeting a certain market share threshold and (2) the absence of ?hardcore? anti competitive restraints, listed in the EU Regulation, in the distribution agreements concerned. The conditions for such exemption, previously provided for in the EU exemption regulation n°2790/1999, are now contained in the new EU Regulation adopted by the Commission on 20 April 2010. This regulation entered into force on 1 June 2010, with a transitional period of one year during which the agreements already in force on 31 May 2010 which do not satisfy the conditions for exemption provided for in the new Regulation but which satisfy the conditions for exemption provided for in the regulation n°2790/1999, are not submitted to the new exemption Regulation.

The implementation of the EU Regulation has a fundamental consequence: it does not create any distinction, in order to exempt a selective distribution system, based on the type of products concerned. If the conditions provided for by the regulation are satisfied, every type of product may benefit from a selective distribution system. In that case, the refusal to supply to an unauthorised distributor will not be considered as unjustified. This statement can be moderated in the light of the European Commission?s Guidelines on vertical restraints. The Guidelines state that the benefit of the exemption may be ?withdrawn? if the characteristics of the product concerned do not require selective distribution. Such a withdrawal of the exemption requires that the case be brought before the Commission or the relevant national competition authority, for example, by a non-authorised distributor.

It should be noted that the EU Regulation provides for a new market share threshold. Under the new rules, in order to benefit from the exemption, the market share held by the supplier should not exceed 30% of the relevant market on which it sells the products and the market share held by the distributor should not exceed 30% of the relevant market on which it purchases the products. This new rule aims at taking into account recent market developments, in particular the increased buyer power of big retailers.

2. Selection process

One of the main factors of litigation concerning selective distribution networks in France concerns the process for the selection of distributors. Sometimes, unauthorised distributors sue the supplier on the basis of a discriminatory or unjustified selection process.

According to European case law, (1) the distributors must be chosen on the basis of objective criteria which are laid down uniformly for all potential resellers and which are not applied in a discriminatory fashion, (2) the criteria laid down should not go beyond what is necessary. French competition authority and national courts draw largely on these principles.

However, The EU Regulation mentioned above does not create any distinction based on the selection modalities, in order to exempt a selective distribution network, whenever the conditions for an exemption are met. When the conditions relating to the market share threshold and the absence of severe restrictions of competition are fulfilled, the selection process should not be an obstacle to the exemption. When European law applies, national courts must respect the principle of precedence of European law over national law and the EU Regulation should therefore be enforced. However, the case law of French courts on this point is not very consistent. For example, in a recent case the Court of appeal of Paris has assessed whether the selection process was justified, objective and non discriminatory in a case, although the market share of the supplier was below 30%.

3. Protection of the distribution network

An effective selective distribution network requires that the supplier achieves to reserve the sale of his products to authorised distributors. Selective distribution agreements therefore usually contain (1) a provision by which the supplier undertakes to sell the products only to authorised distributors and (2) a provision which forbids the authorised distributors to sell the products to unauthorised retailers.

When the selective distribution network is lawful, the supplier may sue unauthorised retailers, based on a violation of the distribution contracts or unfair competition. The burden of proof of the lawfulness of his network is borne by the supplier. If such proof is achieved, the supplier and / or its authorised distributors may have various causes for action against unauthorised retailers.

The supplier may bring a tort action on the basis of article 1382 of the French civil code. Unauthorised distributors may be punished on this basis in case of breach by selected distributors of their contractual obligations in selling products outside the distribution network. Article L442-6I-6° of the French commercial code has recently created a specific legal provision punishing explicitly the direct or indirect breach of a prohibition to resell products outside a selective distribution network.

On the same legal basis, the action against an unauthorised retailer may be qualified as unfair competition if the plaintiff proves a specific additional faulty behaviour by the non authorised retailer. The following behaviours have been considered faulty: the sale of high tech products by unskilled staff, the commercialisation of products through a method different from the one prescribed by the supplier, the resale of products at prices much lower than those usually fixed, special price offers next to shops fixing normal prices or the sale of products on a web site inconsistent with the standards laid down by the supplier.

Also, the supplier may trigger trademark infringement lawsuits against unauthorised distributors. This type of action is limited by the principle of the exhaustion of rights, according to which right conferred by a trademark does not enable its owner to forbid its use for products which have been put into circulation in the European community by the owner or with its consent. However the exhaustion principle does not apply if the owner justifies legitimate reasons, on grounds of deterioration of the products. The CJUE has for example ruled that the owner of the trademark may prevent from the commercialisation of its products by an importer where the importer has repackaged the product, unless the repackaging does not affect the brand image of the products. Most recently, in the Dior / Copeda case of 2009, the European court has ruled that the resale by a discounter, in violation of a prohibition of resale, could be a trademark infringement if it was demonstrated that the resale caused harm to the brand image.

4. Internet sales

An important debate has occurred in France concerning the Internet sale of products distributed through a selective distribution network. This debate is linked to the European Commission statements in its Guidelines on vertical restraints, according to which Internet sales are generally considered as ?passive sales?, which selected distributors must remain free to make.

New guidelines published by the Commission in 2010 provide that the supplier may require quality standards from its distributors, when using the Internet to resell the products, just as the supplier may impose quality standards for physical shopping premises. The new guidelines also provide that suppliers may require that their distributors have at least one physical shop as a condition for becoming a member of the selective distribution system. One the other hand, the guidelines maintain the principle according to which selected distributors must be allowed to sell the products on the Internet.

In several recent cases, the French competition authority has followed the Commission's position as described above and ruled that the prohibition, by the supplier, for retailers to sell the products through the Internet is a breach of the articles 101 of the Treaty and L420-1 of the French commercial code.

However, in October 2009, the Court of Appeal of Paris asked a preliminary question to the Court of Justice of the European Union as to whether an outright prohibition of Internet sales could be exempted under the EC regulation on vertical restrains. The answer of the Court will be highly relevant and may reverse the Commission's approach on this point. While waiting for the Court's decision, a supplier may nevertheless consider it prudent to continue authorising its distributors to sell the products through Internet, subject to specific quality standards.