WHAT?
One of the common types of distribution agreements are selective
distribution agreements. In a system of selective distribution, the
supplier undertakes to sell the contract goods or services, either
directly or indirectly, only to distributors selected on the basis
of specified criteria and these distributors undertake not to sell
such goods or services to unauthorised distributors within the
territory reserved by the supplier to operate that system.
By way of selective distribution, a supplier thus creates a network
of authorised distributors. The admission to the network can be
subject to purely qualitative criteria only, or additionally to
quantitative criteria, which limit the potential number of
distributors more directly by, for instance, requiring minimum or
maximum sales or fixing the number of distributors.
NOW?
Both purely qualitative selective distribution
and quantitative selective distribution are
covered by the Vertical Block Exemption Regulation
("VBER"), regardless of the nature of the products and
the nature of the selection criteria.
For purely qualitative selective distribution,
relying on the VBER may not even be required: if the selective
distribution system complies with the so-called Metro
criteria laid down by the European Court of Justice, it is
generally considered to fall outside Article 101(1) TFEU. For this
to be the case, the distributors must be selected only on the basis
of objective criteria, required by the nature of the product, which
do not put a direct limit on the number of distributors. Only then
will the selective distribution system be considered to be purely
qualitative of nature.
Under the VBER, the supplier must, in the territory where
it operates selective distribution, prohibit its
authorised distributors from selling to unauthorised dealers. This
belongs to the essence of selective distribution and is not
considered to be a hardcore restriction. Besides this, however, the
authorised distributors operating at the retail level must be
entitled to sell, actively and passively, to all end users in the
"selective territory" and also to other members of the
network. The latter cross-supplies between the members of the
network must be allowed at all times, even between members
operating at different levels of trade. Like in other distribution
systems, the supplier is entitled to prohibit authorised
wholesalers from selling, actively or passively, to end users, and
the supplier can impose a location clause on the members of its
network, thus making sure that they operate from a given place of
establishment. Finally, the Commission imposes an overall
equivalence requirement on the criteria that apply to online and
offline sales: compared to the latter criteria, the former may not
dissuade distributors from using the internet.
The supplier is allowed to impose an active sales restriction on
the members of its network outside the selective
territory, to territories in which the supplier has
appointed an exclusive distributor (Vertical Guidelines, no. 56).
Inversely, selective distributors are not protected against active
or passive sales by (exclusive) distributors located outside the
selective territory into the selective territory.
THE FUTURE AS OF 1 JUNE 2022?
The draft VBER and draft Vertical Guidelines contain some
important developments in respect of selective distribution.
The draft VBER expressly distinguishes between hardcore
restrictions in three types of distribution systems: exclusive
distribution (Article 4(b)), selective distribution (Article (4(c))
and distribution which is neither exclusive or selective (Article
4(d)).
In order to analyse the impact of the list of hardcore restrictions
on selective distribution, account must be also be taken of the
list of hardcore restrictions for the non-selective distribution.
This shows that the draft VBER grants the authorised distributors,
which often invest in the supplier's brand, enhanced protection
against sales by unauthorised distributors.
The draft VBER does so in two ways. Firstly, the supplier will be
allowed to prohibit sales to unauthorised distributors in the
selective territory not only by the authorised distributors
themselves, but also by their customers (Article 4(c)(i),
second indent). Secondly, the supplier will be allowed to impose a
restriction on (exclusive) distributors and/or their
customers outside the selective territory to sell actively
or passively to unauthorized distributors located inside the
selective territory (Article 4(b)(ii) and 4(d)(ii)). This
"reverse protection" is separately dealt with in the next
DLC countdown 20.
The draft Vertical Guidelines, in their turn, provide more
flexibility in defining the online criteria. The Commission indeed
no longer imposes an overall equivalence requirement on the
criteria that apply to online and offline sales. A supplier will be
allowed to have different online criteria, provided that these do
not have as their object to prevent the authorised distributors or
their customers from effectively having online sales.
IN PRACTICE?
Practitioners have long struggled with the creation of or the transition to a system of selective distribution in the EU, particularly because they have to apply an all or nothing approach. If selective distribution is not immediately applied throughout the EU, which frequently is the case for SMEs, the supplier is currently not allowed to protect its authorised distributors against sales by distributors located outside the selective territory to unauthorised distributors in the selective territory. Imposing a prohibition on such sales currently amount to imposing an illegal customer/territorial restriction on the latter distributors. The draft VBER remedies this and allows the gradual rollout of selective distribution in the EU.
ASSESSMENT?
The upcoming changes of the draft VBER and the Vertical
Guidelines are to be welcomed. They incorporate the developments of
the case-law since the entry into force of the VBER and, in so
doing, they bring selective distribution into the new millennium,
where online sales have come to occupy a much more important role.
Suppliers will have more flexibility to draft the selective
criteria applicable to online sales by authorised distributors,
without having to worry about the currently applicable equivalence
requirement between online and offline selective criteria.
In addition, the increased protection of authorised distributors
against sales of the contract products by unauthorized distributors
is to be welcomed. Authorised distributors often invest in a
supplier's brand and are discouraged by sales by authorised
distributors, leading to a potential unwillingness to keep up such
investments. Moreover, the gradual rollout of selective
distribution in the EU benefits SMEs.
To end on a note of caution, what is worrying is that the draft
Vertical Guidelines, like they do in respect of non-selective
distribution, foreshadow that the Commission intends to have more
recourse to its possibility to withdraw the benefit of the VBER.
For selective distribution, for example, the Commission mentions
that the VBER is likely to be withdrawn where the products
do not require selective distribution or the applied criteria, such
as the requirement to have one or more brick-and-mortar shops. This
is a worrying development in view of the safe harbour (and legal
certainty) which a block exemption is supposed to offer the market
participants.
DISTRIBUTION LAW CENTER
The "DLC countdown" newsletters are offered to you by HAVEL & PARTNERS.
Originally published 28 April 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
