What happens if a manufacturer applies a mixed system (selective and exclusive distribution) within Europe? What are the main advantages and disadvantages?

As already noted, the European legislator has always been committed to finding a balance between the principle of free trade of goods and the interest of producers in creating competitive distribution networks. competitive distribution networks.

The compromise reached by the legislator is now governed by the Regulation 330/2010 on vertical sales, which determines which agreements between undertakings belonging to the same distribution network are subject to the prohibition of agreements imposed by theArt. 101(1) of the European Treaty and which, instead, benefit from the exemption from this prohibition (formerly Art. 103(3)).

In essence, the producer is given a choice between two modes of of distribution: a general one that can be used by any type of producer (the (the exclusive one) and a particular one for specific situations (the selective one) (cf. on this point The selective distribution. A brief overview: risks and benefits e Clauses exclusivity and vertical economic agreements in the European context: e-commerce and territorial exclusivity).

With the exclusive distributionthe supplier divides the markets in in which it operates through the appointment of exclusive distributors, who undertake to purchase the goods and to promote their sale in an unrestricted manner. free.

Article 4(a) of the Regulation provides, in fact, that the manufacturer may not may not restrict, either directly or indirectly,[1] the power of the exclusive distributor to determine the resale price, without prejudice to the possibility of imposing a maximum price or recommending a selling price.[2]

The manufacturer will also not be able to prevent, formerly Article 4(a) of the Regulation, that the distributor make active sales[3] within the territory, subject to the option of reserving for itself customers and prevent them from selling at retail level, in order to keep this level of the commercial chain, distinct from the retail level.[4]

Finally, the distributor shall also have the right to make sales outside the territory, provided that they are in response to unsolicited orders from individual customers located outside the territory (so called sales liabilities).[5]

It is clear that such freedom of the exclusive distributor is often incompatible with what are the interests of certain types of producers, in in particular of those working in the luxury sector or developing products that are technically very complexwho will be more interested in having their products resold rather than distribution, in the fact that their products are resold only by authorised resellers.

As has already been discussedexceptionally for specific situations there is the option for the manufacturer to create a distribution selectivewhich allows him, formerly Article 4(b)(iii), to prohibit members of the selective system from sell to unauthorised distributors in the territory that the producer has reserved for that system: in a selective system, goods may only pass from the hands of an undertaking admitted to the network to those of another, or to those of the end user.[6]

In accordance with the principle of free trade in goods, as counterpart of the producer's right to impose such restrictions on the freedom of resale of the members of the system, the Regulation:

  • Article 4(b)(iv) confers on them the freedom to carry out the so-called cross-sellingwhich consist of unhindered procurement from "other designated distributors in the network, operating at the same or a different level of trade'.[7];
  • Article 4(c) prevents the manufacturer from restricting to members of a selective distribution system, operating in the retail trade, the active or passive sales to end users.[8]

That being said, very often a producer, for practical, managerial and economic reasons, is unable to apply a single distribution system for the entire European market and reserves selective distribution only for those countries that are most strategic for him. In this context, the question arises, firstly, whether such a 'mixed' system is legitimate and, secondly, what risks are attached to it.

1. Mixed systems within the same territory.

The adoption of a mixed system within the same territory would lead to a conflict of interest between the exclusive distributor, which would have the right to be protected from active sales within its territory, and the selective distributor, which would have the right to make active and passive sales within the exclusive territory, pursuant to Article 4(c) of the Regulation.

The Commission questioned the legitimacy of a mixed system and clarified through the Guidelines that such a combination is not admissible "within the territory in which the supplier operates selective distribution [...] as it would make it a restriction of active or passive sales by resellers". incompatible with Article 4(c).[9]

2. Mixed systems in different EU territories.

Given that the Guidelines' prohibition on applying a mixed system refers only to the circumstance that it is developed within the same territory, it is implicitly inferred that the right antitrust does not prohibit the producer to create a mixed system within the different Member States.

This does not detract from the fact that this choice, although legitimate, may nevertheless create problems of no small importance, consisting mainly of the producer's inability to control:

  • sales from the exclusive territory to the selective territory;
  • sales from the selective territory, directed to the exclusive territory.

The individual cases are briefly analysed below.

a) Sales from the exclusive territory, directed to the selective territory.

The fact that the exclusive distributor may not be prevented from making passive sales outside the territory, and thus also within a selective distribution system that the manufacturer has reserved for another territory, is rather self-evident.

More controversial (and impactful from a commercial point of view) is the question of whether the exclusive distributor may also sales active within the selective territory and, therefore, also carry out real commercial campaigns within that territory. A strict reading a strict reading of the Regulation, it follows that Article 4(b)(i) prohibits the exclusive distributors from carrying out active sales "in the territory exclusive territory or to exclusive customers reserved to the supplier or by the supplier attributed to another buyer'. and does not extend this prohibition to the distribution system.

To date, there are no case law precedents that have clarified this question, which remains open. In any event, it is believed that a contractual clause requiring the exclusive distributor to make active sales in the selective system, which, due to the manner in which they are presented to the public, may be legitimate, do not harm the image luxury and prestige of the manufacturer's products (on this point see also Online sales by unauthorised distributors. The Amazon, L'Oréal and Sisley cases.).

b) Sales from the selective territory to the exclusive territory.

The problems for the exclusive producer, in case the producer creates a mixed market, are essentially related to the fact that:

  • in the first place, formerly Article 4(c) of the Regulation, the manufacturer may not prohibit authorised retailers from passive and active sales within the EU. The question arises whether these should also include the sales within the exclusive territoryor if the distributor's exclusivity protects him from such sales actions;
  • secondly, the manufacturer may prohibit, formerly Article 4(b)(iii), sales by members of the selective system to unauthorised resellers unauthorised resellers within the territory that the producer has reserved for that system. It follows that, on a restrictive reading of the rule that prohibition would not appear to be able to be extended to the sales that the selected distributors make outside the selective distribution system selectiveIf this interpretation were to be followed, authorised distributors could sell freely within a different territory recognised exclusively exclusive to a distributor appointed by the manufacturer.

With reference to the above points, it should be noted that the Guidelines state that "retailers in a selective distribution system selective distribution system [...] no restrictions may be imposed except to protect an exclusive distribution system operated elsewhere."[10]

There is a serious uncertainty of interpretation, given that a reading of the statutory text inclines towards the view that the holder of an exclusive right does not have the right to be protected from "invasion area" by selective distributors, whereas the Guidelines would inclined towards the opposite thesis.[11]

The only thing that is certain is that the risks to create a mixed system are very high and that if such a distribution strategy is adopted by the manufacturer, in the medium to long term it would lead to great difficulties in the management, especially of the parallel sales and reciprocal and continuous area invasions.

[1] Article 4(a) provides, in fact, that the imposition of of fixed prices may not take place even indirectly, as a result of pressure exerted or incentives offered by one of the parties. The Orientations, No. 48 list numerous examples of such measures and, in particular, "agreements fixing the distributor's margin, or the maximum level of discounts that the distributor may grant from a prescribed price level; the the tying of discounts or reimbursement of promotional costs by the promotional costs by the supplier subject to compliance with a given price level; the linking of the resale price imposed to the resale prices of competitors; threats intimidation, warnings, penalties, postponement or suspension of deliveries or termination of contracts in relation to compliance with a given price level; the price"In case law, the Commission's decision is referred to, Yamaha Case, 16.7.2003in which I was recognised as imposing indirect taxation of prices the following clause: premiums/bonus "will be only granted to retailers who have applied, in their advertising, the normal margins" and that "advertising and promotional promotions involving discounts in excess of 15% would not be considered normal."

[2] Importantly, the Guidelines, No. 225 justify this choice of the European legislator, considering that ''the imposition of resale price maintenance may [...] reduce dynamism and innovation at the distribution level [and thus] prevent more efficient retailers from entering the market. distribution level [and thus] prevent more efficient retailers from entering the market and/or acquire sufficient scale with low prices.' On the other on the other hand, it is also acknowledged that "Sometimes the imposition of resale price maintenance does not only have the effect of restricting competition but may lead, in particular if determined by the supplier, to efficiencies efficiencies, which will be assessed under Article 101(3). 3 [...]. Resale price maintenance plus avoidance of parasitism [...].  According to the best doctrine (Pappalardo, 356, op. cit.) pending decisions to verify with this openness of the Commission, certainly the foundation of the open and positive approach of the Commission, it is preferable to consider it as the confirmation of the absence, in EU competition law, of prohibitions automatic.

[3] Cf. Orientations, no. 51.

[4] On this point, see also Guidelines, no. 55.

[5] Cf. Guidelines, no. 51.

[6] Cf. Pappalardo, Competition law of the European Union, p. 363, 2018, UTET.

[7] On this point, the Guidelines, no. 58, state that '[...] an agreement or concerted practice may not have as its direct or indirect object to object of preventing or restricting active or passive sales of the contractual products between the selected distributors, who must remain free to purchase those products from other designated distributors in the network, operating at the same or a different level of trade. "

[8]

[9] N. 57.

[10] Guidelines, n. 56.

[11] On the point, see Pappalardo, op. cit., 364.