Termination of the sales concession contract and inventory management: rights and obligations of the parties.
Sales dealership agreements often contain an agreement on how to deal with the stock of goods purchased by the dealer during the term of the agreement; this regulation may take the form of an option for the franchisor to repurchase the goods at a certain price, or the former dealer may distribute these goods.
Other times, the parties do not provide for any contractual provision governing this case, and upon termination of the relationship, the problem arises as to whether or not the former dealer may resell the stock in inventory, or require the supplier to repurchase the goods.
In the following, these cases will be analysed, albeit briefly, in view of their relevance from both a technical and legal as well as a practical and commercial point of view.
1. Absence of a written agreement in the concession contract.
1.1. Right to resell products in stock.
In the absence of different contractual agreements, the case under analysis must be treated from two different aspects: under the principles of civil law, on the one hand, and those of intellectual property law, on the other.
Civilly the grantor may not prevent his dealer from reselling the goods purchased by the latter, unless the same have been sold subject to reservation of title and the dealer disposes of the contractual goods before becoming the owner: in this case, in addition to the breach of contract, the disposal will even constitute the offence of embezzlement (Art. 646 of the Criminal Code).[1]
From the point of view of intellectual property lawInstead, it is necessary to take up a principle that has already been addressed several times in this blogthat of thebrand exhaustionreferred to inart. 5 c.p.i.
Read also - Parallel sales and the principle of trade mark exhaustion.
According to this principle, once the owner of one or more industrial property rights places a good directly or with his consent on the market in the territory of the European Union, he loses the relevant rights.
The exclusivity is therefore limited to the first act of marketingwhereas no exclusivity can subsequently be claimed by the proprietor of the trade mark on the circulation of the product bearing the mark.
Since in a sales dealership agreement, the consent to the first placing on the market (i.e. the sale by the grantor to the dealer) stems from the contractual relationship between the parties, in the absence of any agreement to the contrary, the grantor may not oppose the resale of the contractual goods even once the relationship has ended.
It is stated in case law on the subject that:
"the entrepreneur, who has purchased goods with distinctive signs, is indeed entitled to market the product even after termination of the relationship because, according to the principle of exhaustion, the holder of an industrial property right cannot oppose the circulation of a product, to which that right relates, when that product has been placed on the market by the holder of that right or with his consent in the territory of the state or in the territory of other Member States of the European Union."[2]
The principle of exhaustion nevertheless knows a limitation: the second paragraph of Art. 5 of the IPC contains a safeguard rule that allows the trade mark proprietor to oppose the circulation of the product placed on the market with his consent and, therefore, "exhausted", if there are
"legitimate reasons for the proprietor to object to the further marketing of the products, in particular when their condition is changed or altered after they have been placed on the market".
Therefore, in the absence of 'legitimate reasons'[3]the supplier may not prevent the dealer from reselling inventories, let alone from using its trade mark, if it is used by the dealer for the sole purpose of advertising the availability of the product it intends to sell or lease and the advertising activity is not such as to create in the public the belief that the dealer is part of the licensor's authorised network, otherwise such conduct would constitute a confusing offence under Article 2598(1)(1) of the Civil Code on the subject of unfair competition.[4]
1.2. Right to have inventories repurchased.
In the absence of a contractual obligation, in order to understand whether the dealer may require the grantor to repurchase the goods remaining in stock, one must refer primarily to the principles of loyalty and good faith formerly Article 1375 of the Civil Code.
The clause of good faith in the performance of the contract operates as a criterion of reciprocity, requiring each party to the obligatory relationship to act in such a way as to preserve the interests of the other, and constitutes an autonomous legal duty incumbent on the parties to the contract, irrespective of the existence of specific contractual obligations or of what is expressly laid down by law.[5]
Since this is a very broad principle and certainly not easy to implement in practice, it is necessary to assess from time to time how it should be applied to the concrete case, on the basis of all those factors that may impact on the contractual balance: it will certainly be assessed differently if the concessionaire had been contractually obliged to maintain a stock in stock, as opposed to the case where the stocks are due to a failure to adhere to the rules of prudence, which should have advised the dealer to suspend or otherwise reduce purchases and dispose of medium warmth inventories in view of an upcoming report.[6]
A ruling by the Court of Milan is recorded,[7] which considered contrary to these principles the conduct of a supplier who prevented (contrary to the principle of exhaustion) the plaintiff from marketing the product it had supplied prior to withdrawal, without having cooperated in safeguarding the interest of the other party by making available - although not contractually provided for - the repurchase of the goods.
The Court therefore ordered the defendant to pay damages, quantified in the value of the goods remaining in stock.
There is also a further ruling, again by the Court of Milan,[8] relating to a licensing relationship, in which the court reached such a result with the aid of the instrument provided by Article 1340 of the Civil Code, according to which contractual usages or usage clauses are deemed to be included in the contract if it is not apparent that they were not intended by the parties.
The Court therefore held that the licensor was obliged to repurchase the goods sold, in addition to cooperation and conduct in good faith, on the basis of the fact that in the industry in which the parties operated it was customary for the licensor to purchase at least part of the unsold goods following the termination of the relationship.
2. Existence of an agreement between the grantor and the concessionaire.
2.1. Prohibition to resell stock.
A contractual clause that imposes a prohibition on the dealer to sell goods in stock following termination of the contractual relationship, without there being a commitment on the part of the grantor to repurchase such goods, is, in the opinion of the writer, of doubtful validity, both from a antitrustand civil law, for the reasons set out below.
In the field of antitrustArticle 5(b) of the Regulation 330/2010imposes limitations on the supplier's ability to require its buyer to engage in competitive activities after termination of the relationship. "The parties may not impose any direct or indirect obligation on the buyer, after the agreement has expired, not to manufacture, purchase, sell or resell certain goods or services, unless such obligation [...].:
- refers to goods or services in competition with the contract goods or services;
- is limited to the premises and land from which the purchaser has operated during the contractual period;
- is indispensable to protect the 'know-how' transferred from supplier to purchaser;
- the duration of this obligation is limited to one year. "
Since the requirements for the legitimacy of this obligation are cumulative, the rule does not normally apply to typical forms of sales concessions, which do not imply the need to protect know-how provided to retailers, but rather to the franchising,[9] with the consequence that this exemption can hardly be applied to the contractual case under analysis.
Moreover, the non-compete obligation is not part of the 'severe restrictions' (hardcore) governed by Article 4 of the Regulationbut of those that are simply not exempt, with the consequence that these limitations are only applied to contracts that have no less importancei.e. which do not appreciably restrict competition: this is the case whenever the market share held by each of the parties to the agreement exceeds 15% on the relevant markets affected by the agreement.[10]
If the dealership contract qualifies as a contract of minor importance, an agreement imposing a prohibition on the resale of the stored goods would benefit from the exemption and would (at least from a antitrust) lawful.
Mind you, this does not alter the fact that such a contractual agreement must in any case be subjected to the scrutiny of the principles of good faith and contractual fairness, so that it may be invalid if it is not adequately counterbalanced by - for example - an obligation on the part of the grantor to repurchase the goods in stock, in particular if the latter was contractually obliged to maintain a stock minimum in stock in the course of the report.[11]
2.2. The grantor's right to repurchase the goods.
A different reasoning must be made - again for the purpose of assessing its legality - in the case where the parties provide for a right of the grantor to repurchase the stock of the products, following the termination of the relationship.
To do so, it is first necessary to understand the legal nature of such an agreement, i.e. whether it should be framed as:
- preliminary contract formerly 1351 of the Civil Code, ancillary to the concession contract, i.e.
- purchase option agreement, formerly 1331 c.c.
The differences between these institutions are briefly examined below.
(a) Preliminary contract.
This is the case whenever in the contract both parties agree that upon termination of the relationship the products to stock will be bought back by the supplier at an agreed price.
Ex. The parties agree that at the end of the contract the dealer shall be obliged to resell to the licensor the entire remaining stock of products at a price equal to the invoice price net of VAT, with a discount of _____.
Such a contractual clause (which would indeed constitute a preliminary contract) is certainly valid, unless it is proved that the contract was null and void ab originee.g. for lack of consent of one of the parties, abuse of rights, etc.
(b) Call option covenant.
If, on the other hand, in the contract one party undertakes to hold firm to its own proposal and the other party (the beneficiary) is granted the right to make use of the option to accept the proposal or not, we fall into the different case of the option contract formerly Article 1331 of the Civil Code.
Ex. At the end of the contract, the grantor has the option to repurchase the stock at the price _______, to be notified within _____ of the termination of the contract.
Such an agreement must also tend to be considered valid; the only problem might be connected with the case where the option right is granted free of charge, i.e. without payment of a price (so-called premium).
Some (albeit minority) case law[12] holds that in such a case the option agreement would be null and void, since the right cannot be granted free of charge (e.g. a discount on the repurchase of goods). It should be noted, however, that the majority jurisprudence is in favour of the option being gratuitous: "Article 1331 of the Civil Code does not provide for the payment of any consideration and, therefore, the option may be offered for consideration or free of charge".[13]
[1] Torrente - Schlesinger, Handbook of Private Law, Giuffrè, § 377.
[2] Trib. Milan, 6.5.2015; in case law Court of Justice, 8.7.2010, Portakabin case.
[3] The following constitute 'legitimate reasons' for the non-application of the principle of trade mark exhaustion: (a) the modification or alteration of the condition of the goods, after they have been put on the market and (b) all those cases implying a serious and grave prejudice: the latter must be ascertained in concreto. On this point cf. Trib. Milan 17.3.2016.
[4] On this point Civil cassation 1998, no. 10416; Trib. Rome, 28.4.2004.
[5] Cass. Civ. 2014, no. 1179.
[6] On this point cf. Trib. Milan, 19.9.2014.
[9] Bortolotti, Distribution Contracts, Walters Kluver, 2016.
[10] Cf. De Minimis Communication 2014 of the EU Commissionin conjunction with the Commission Notice on Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty.
[11] On this point cf. Trib. Milan, 19.9.2014.
[12] See Appeal Milan 5.2.1997.
[13] Trib. Milan 3.10.2013
