Parallel sales in distribution systems are a relevant and complex topic in antitrust law, having very significant practical impacts on commercial policies at all levels of the distribution chain. This phenomenon plays a particularly central role in selective distribution, a form of sales organisation in which the supplier establishes specific criteria for selecting authorised distributors, mainly with the aim of limiting the resale of its products outside the authorised network and protecting its brand prestige.

However, irrespective of the manufacturer's distribution plans, the distribution system can never be completely 'watertight' (which would otherwise be contrary to the founding principles of the European Union[1]), and it often happens that products are sold, even within the territory where an exclusive distribution system has been set up, by parallel sellers.

This article aims to clarify the essential requirements and conditions for a supplier to establish a selective distribution network and to analyse the legal means available to protect that network from unauthorised sales. These sales, made by unauthorised distributors through parallel channels, may in fact compromise both the brand image and the perceived quality of the products.

______________________________

1. Definition and purpose of selective distribution.

According to Article 1 of the EU Regulation 2022/720a selective distribution system is defined as a system in which the supplier undertakes to sell the contractual goods or services exclusively to selected distributors, based on specific criteria, and those distributors undertake not to resell those products to unauthorised resellers in the territories reserved for the system.

Selective distribution is essentially distinguished from exclusive distribution by the fact that the manufacturer may require the members of its network to sell products exclusively to authorised dealers, or alternatively also to external parties, provided that they meet the quality standards defined by the manufacturer and imposed on the authorised dealers themselves.[2]

Given that this is a structure that restricts competition in a very important way (certainly more than exclusive distribution), its applicability raises significant questions of compatibility with European antitrust rules, in particular in relation to theArticle 101 of the Treaty on the Functioning of the European Union (TFEU).[3]

First of all, it is necessary to start from the assumption that the legal principle adopted by the European legislator, most recently confirmed by EU Regulation 2022/720, is based on the assumption that selective distribution is designed to meet specific market needs that are not met by exclusive distribution. These needs mainly concern the protection of luxury or technologically advanced products, which require particularly complex and accurate commercial management.

Indeed, there is no doubt that the quality of such products derives not only from their material characteristics, but also from the manner in which they are sold, presented and marketed to the public. These ways help to preserve the style and prestigious image that gives them an aura of luxury, an essential element in distinguishing them from similar products in the eyes of consumers. With the consequence that any damage to this aura of luxury can compromise the perceived quality of the products themselves.[4]

In this context, the Court held, in particular, that the organisation of a selective distribution system aimed at ensuring a presentation that enhances prestige products at the point of sale may contribute to the reputation of the products in question and thus to safeguarding their aura of luxury.[5]

The protection of the aura and image of the trade mark is the main objective pursued by the manufacturer and, at the same time, as will be seen, represents the tool available to the proprietor to adequately protect himself against parallel sales.

______________________________

2. The requirements of the selective distribution system.

The Court's case law has established that, in order to assess the compatibility of a selective distribution system with Article 101, it is necessary to apply three criteria, better known as the criteria Metro (named after the famous ruling[6]), which can be summarised as follows:

  • First, the nature of the goods or services in question must justify the adoption of a selective distribution system. This means that, depending on the specific characteristics of the product, such a system must be a legitimate requirement to preserve its quality and ensure its proper use (as anticipated, recourse to selective distribution may be legitimate for high-quality, technologically advanced products[7] or luxury goods[8]).
  • Secondly, the selection of dealers must be based on objective criteria of a qualitative nature, established indiscriminately for all potential dealers and applied in a non-discriminatory manner.
  • Thirdly, the criteria set must not exceed what is necessary.

Based on these assumptions, European case law, while recognising that selective distribution affects competition in the internal market, justifies its adoption if it is adopted with the aim of supporting specialised trade, capable of satisfying particular demands and guaranteeing the quality and technological value of the products distributed. These requirements make it possible to overcome competition based primarily on price by placing more emphasis on factors such as quality of service and after-sales support, elements that aim to achieve a legitimate result and contribute to qualitative competition.[9]

______________________________

3. Contractual clauses aimed at trade mark protection.

In the context of selective distribution, the manufacturer or supplier establishes a series of contractual commitments that the authorised retailer is obliged to respect in order to ensure the protection of the brand's positioning and image. Although the clauses may vary, they are mainly aimed at preserving quality standards and ensuring that products are displayed in a way that respects the image and reputation of the brand.

Below we analyse the most relevant contractual commitments that the selective distributor must fulfil, taking a cue from a recent order of the Court of Milan.[10]

Exclusivity and preservation of the brand imageOne of the main obligations concerns the exclusivity of the point of sale. The authorised retailer is obliged to display and sell products exclusively at its point of sale (whether physical or online), avoiding any display or sale outside. It is also forbidden to sell products in the vicinity that, due to their inferior nature or quality, could devalue the image of the brand represented. Retailers are sometimes allowed to market competing brands only if they are compatible with the image and reputation of the brand. In practice, the intention is to ensure that the products are placed in appropriate contexts and do not compromise the aura of exclusivity and luxury of the brand.

Product and brand display: The selective distribution contract imposes specific obligations on brand display. The retailer must position the products strategically, using dedicated displays and nameplates with the brand logo. This is aimed at highlighting the prestige of the brand. In addition, products must be presented in dedicated furniture, maintaining dimensional and visual characteristics that reflect their positioning. This attention to detail reinforces the perception of the brand and presents it to the consumer in a manner consistent with its luxury image.

Quality standards: To maintain a service and shopping experience aligned with brand expectations, the retailer must meet specific quality standards. This includes the competence of staff, who must have appropriate training and experience. The objective of these requirements is to ensure that every customer interaction reflects the brand's values, providing a superior service that is characterised by attention to detail and professionalism.

Advisory service to shops: In order to enhance the value of the products and support the customer in his choice (who in this case is the retailer), the authorised retailer may be required in some contracts to offer an appropriate advisory service. This service must be proportionate to the surface area of the shop, the number of brands present and the quantity of products available. The advice is conceived as an added value, aimed at enhancing the shopping experience and consolidating the perception of quality and brand specialisation.

Correct storage of products: The authorised retailer undertakes to offer customers perfectly preserved products with their original presentation or packaging. This ensures that the products are always in the best possible condition, reinforcing consumer confidence and preserving the quality associated with the brand.

______________________________

4. The so-called. selective repair

In selective distribution, the distributor often aims to maintain a high standard covering all stages of the sale - from offer to purchase to repair - in order to guarantee a consistent level of quality and a homogeneous consumer experience. In this context, there is a need to also include after-sales service in the network, creating a so-called selective repair system.

This choice is particularly relevant for those products that require specific maintenance, which is essential to preserve their quality and ensure optimal use.

EU case law has long held that selective distribution may require a sales and after-sales service tailored to the particularities of the specific type of distribution adopted.[11] On this subject, the Court of Milan has also recently ruled, in the present case and in general terms, that the admissibility of a selective resale system is not justified so much by the preservation of the image of the trade mark per se, which could lead to a restriction of competition, but rather by the objective of maintaining the quality of the products in their proper use, as well as the pursuit of a specialised trade, capable of offering specific services for products with a high level of quality and technology.[12]

On the basis of the above-mentioned case law, selective repair would seem to require an additional requirement over and above those for selective distribution: not only the protection of the prestige of the brand, but also the guarantee of the maintenance of product quality, which might otherwise be compromised by repairers outside the selective network who do not meet the quality standards imposed by the manufacturer on authorised members.

______________________________

5. Parallel sales in selective distribution systems.

5.1. Non-contractual relationships in the context of parallel sales.

It often happens that, even within a selective distribution system, sales are made by parties outside the authorised network, so-called parallel sales. These are sales by third parties with whom the manufacturer does not have a direct contractual relationship, but a relationship of a non-contractual nature. This implies that the terms of sale agreed upon between the right holder and the authorised resellers, being effective only between the parties, cannot be imposed on third parties, pursuant to Article 1372(2) of the Civil Code.

In other words, the supplier finds itself unable to directly enforce its contractual terms against unauthorised parties, and thus cannot resort to the legal instruments typical of contractual relations. Developing this principle, the same Court of Cassation has repeatedly confirmed that the owner cannot extend the contractual limitations of the selective network to unauthorised parties, unless there is actual prejudice to the image of the trade mark.[13]

Given the non-contractual nature of the relationship, in order to protect its brand and the quality of its distribution network, the supplier can/should thus rely on alternative legal instruments, mainly related to intellectual property law.[14]

______________________________

5.2. The principle of trade mark exhaustion: limits and protection of the brand image.

Article 7 of European Directive 2008/95/EC, implemented in Italy by Article 5 of the Industrial Property Code, introduced the principle of trade mark exhaustion into our legal system. According to this principle, once a product is placed on the EU market by the trademark owner or with his consent, the exclusive rights to that product are exhausted, limiting the exclusivity to the first act of marketing. However, there is an exception to this rule: Para. 2 of Art. 5 IPC allows the proprietor to oppose a subsequent sale if there are "legitimate reasons," such as the risk of damaging the luxury and prestige image of the trade mark.

Read also: Parallel sales and the principle of brand exhaustion.

Community case law has clarified that a selective distribution network may be considered among the 'legitimate grounds' for trade mark protection when unauthorised distribution risks compromising the image and distinctive value of luxury or high prestige products. In such cases, the objective of the selective network is not only to limit competition, but also to ensure that products are distributed in a context that preserves their exclusive aura, maintaining high quality standards and a shopping experience in line with the public's expectations for that type of product.[15]

In line with the above, national case law has confirmed that the trade mark proprietor may legitimately oppose resale outside the selective network only if such marketing results in actual or potential damage to the reputation of the trade mark.[16]

On the other hand, case law has made it clear that the third party cannot justify its parallel selling activity simply by claiming that it purchased the products from an authorised dealer who, in turn, breached his own contractual obligations.[17] Likewise, it is not sufficient to invoke non-compliance with the requirements by other authorised dealers as a pretext for legitimising the sale outside the network. In this regard, case law emphasises that "non-compliance with the requirements by other authorised dealers does not exclude the tort, and thus the breach of the general conditions of sale."[18]

It follows that, if the parallel sale is carried out in such a way as not to harm the image or perceived quality of the trade mark, the proprietor cannot oppose such resale, since, in the absence of actual or potential damage to the reputation of the trade mark itself, the legitimate reasons justifying the blocking of the parallel sale lapse.

______________________________

5.3. Proof of injury.

Finally, it is important to note that, in order to justify an exception to the principle of exhaustion, the mere danger or possibility of harm is not sufficient: the actual existence of concrete harm is required. Accordingly, the injury must emerge from specific and demonstrable circumstances; it is not sufficient, therefore, merely to point to a particular selling pattern implemented by third parties outside the selective network. It must be shown that those arrangements cause, in the specific case, serious harm to the aura of prestige of the trade mark.[19]

Case law has clarified that the "minimum measure of respect for the image" of luxury marks lies in the need for the products bearing those marks, characterised by refinement and intrinsic quality, not to be associated with similar but poor quality products, or with products that are entirely different and lacking in prestige. Ultimately, it is essential that the presentation of luxury products not be associated with other products lacking similar characteristics in order to preserve the exclusive image and high perceived value of the brand.[20]

______________________________

[1] This principle was first introduced, albeit with reference to exclusive selling, by the historic Grundig judgments, Judgment of 13 July 1966, Joined Cases Costen and Grundig 56/64 and 58/64.

[2] See Art. 4(c), VBER 720/2022.

[3] CFr. 146 et seq. Guidelines on Vertical Restraints 2022/C 248/01

[4]See to that effect, judgment of 23 April 2009, Copad, C-59/08, EU:C:2009:260, paragraphs 24-26 and case law cited therein

[5] In this sense, judgment of 23 April 2009, Copad, C-59/08, EU:C:2009:260, paragraph 29.

[6] Judgment of 25 October 1977, Metro/Commission, C-26/76.

[7] Case Metro v Commission, Case C-107/82 - AEG v Commission.

[8] See Case C-230/16 , Case Coty Germany.

[9] EU General Court of 25 October 1983, Telefunken v. Commission, 107/82, and Court of Justice of 13 October 2011, Pierre Fabre Dermo-Cosmétique, C-439/09, para. 39.

[10] Court of Milan, Order of 2 January 2023.

[11] EU General Court, Metro/Commission, judgment of 22 October 1980, 75/84, para. 54.

[12] Court of Milan, judgment of 27 September 2022, no. 7389.

[13] Supreme Court, 14 March 2023, No. 7378.

[14] Court of Milan, order of 17 March 2016; European Court of Justice, judgment of 30 November 2004, C-16/03; Court of Milan, judgment of 9 December 2008.

[15] EU Court of Justice, Case C-59/08, Copad vs. Christian Dior.

[16] Court of Milan, 11 January 2016; Court of Turin, 17 December 2018.

[17] Court of Milan, Order of 2 January 2023.

[18] Court of Milan, 20 July 2018.

[19] Court Milan, Order 17.3.2023.

[20] Court Milan, Order 12.1.2021.