Selective distribution. A brief overview: risks and benefits.
Certain products, depending on their intrinsic characteristics (e.g. the luxury sector, i.e. technically very complex products), often require a more select and careful resale system than consumer products.
In such cases, the manufacturer is inclined, not so much to focus on the vastness and capillarity of its sales network, as to favour a restriction of commercial channelsThey prefer to entrust their products to a small number of specialised dealers, chosen according to certain objective criteria dictated by the nature of the products: professional competence (as far as would-be distributors are concerned),[1] quality of the service offered, i.e. prestige and care of the premises in which the dealers are to carry out their activities.[2]
1. Definition and brief overview.
Selective distribution refers precisely to a distribution system in which products pass exclusively from the hands of the manufacturer to those of authorised dealers, i.e. to those intermediaries who comply with the form and quality requirements of the manufacturer. The EU Regulation 330/2010 on Vertical Agreements For this purpose, it defines selective distribution as:
"a distribution system in which the supplier undertakes to sell the contract goods or services, directly or indirectly, only to distributors selected on the basis of specified criteria and in which these distributors undertake not to sell such goods or services to unauthorised resellers in the territory reserved by the supplier for that system."
According to the Court, a selective distribution is in conformity with Art. 101 § 3 of the Treaty (and does not fall under general prohibition laid down in § 1 of that Article), essentially if there are three fundamental principles:
- "the choice of dealers is made according to objective criteria of a qualitative nature, concerning the professional qualification of the dealer, his staff and his facilities'.,
- which "these requirements are demanded indiscriminately for all potential resellers".,
- and that "are assessed in a non-discriminatory manner".[3]
In certain cases, the manufacturer may add a further barrier in the selection of those who can join its selective network, as it may consider imposing an additional quantitative restrictionthus opting not to automatically admit to the network all retailers presenting the standards required, but also by limiting the number of recognised entities, often calibrated to take into account the economic potential of the different markets where the contractual products are sold.[4]
The European Court of Justice has granted the exemption for quantitative selective distribution systems, recognising that the restriction has the character of indispensability required by Article 101 § 3 of the Treaty, by virtue of a predominantly economic principle: it has held that such a distribution system is lawful whenever admission to the selective system of all qualified resellers has a negative impact on the profitability of the sales network, since "would reduce the sales possibilities of each of these to a few units per year."[5] We recall here briefly the Case Vichy,[6] in which the manufacturer had reserved the products only for pharmacies for certain cosmetic products.
This was due to the fact that in some countries access to the profession of pharmacist was subject to a closed number. Still the Guidelines on Vertical Restraints (n. 175)[7], make it part of the quantitative restriction, the imposition on the supplier to make a minimum turnoverset by the provider, thus indirectly limiting access to the network to all those who fail to reach the set turnover threshold.
With reference to the type of products for which the use of a selective system may be justified, Regulation 330/2010 makes no mention of this, as it merely gives a definition of such a system. In any case, an answer can be found in the Commission's Guidelines, where at no. 176, it is stated that:
"if the characteristics of the product do not require selective distribution [...], such a distribution system does not generally lead to efficiencies that outweigh a significant reduction in intra-brand competition. If appreciable anti-competitive effects occur, it is likely that the benefit of theblock exemption is revoked".
It can, therefore, be said that selective distribution is reserved only for high quality and technologically developed products; this means that the application of this system to product types that are not "adequate'"The risk of (albeit hypothetical) withdrawal of the exemption by the Commission, or the Authority, for agreements with effects exclusively on the internal market.[8]
Let us now briefly analyse what are the peculiarities of a selective distribution system.
2. Selective distribution and prohibition of selling to outsiders.
The first element is certainly related to the fact that in a distribution system, the producer may impose an obligation not to sell to parties (other than end users) outside the network (Art. 4 (b) (iii)).[9]
This advantage, however, is counterbalanced by the prohibition imposed on the provider by Art. 4(c) to restrict the freedom to make "sales active and passive to end users by members of a selective distribution system operating in the retail trade.'
This prohibition differs from what is normally provided for, formerly Article 4 (b) (i), for distribution systems not selective, which allows the supplier to prohibit its dealers from selling only into territories or groups exclusively reserved for other intermediaries.
Having said that, it should be noted that very often in practice many manufacturers distribute 'selectively' only in the most important markets, while reserving a 'classical' system (i.e. through an exclusive importer) for the other zones. In such a case, the producer may not impose a ban on passive sales, vis-à-vis resellers belonging to areas where the selective system does not exist, but only prohibit him, pursuant to Article 4 (b) (i), from active sales (on this point see The mixed system: when the manufacturer chooses to adopt both exclusive and selective distribution).
3. Selling on the Internet and selective distribution.
The consequence that in the selective system, a retailer belonging to the network cannot be prevented from promoting products and advertising, outside its area, to end users, certainly has a disruptive effect, especially when combined with sales online (on this topic see also 'Can a manufacturer prevent its distributors from selling online?"): it is clear that, given the transversal nature of internetallowing a retailer to sell outside its territory has a very important impact (just think of the complexity of managing a pricing policy). If this is coupled with the fact that with the new Regulation 302/2018 on the so-called. Geoblockingthe EU has prevented unjustified geographical blockades based on the nationality, place of residence or place of establishment of customers within the internal market. [10]
This has prompted many manufacturers to prohibit the use of internet. On the legitimacy of the manufacturer to prevent its resellers/retailers from selling onlinea rather articulate and very complex European jurisprudential current has developed, the analysis of which would require a very in-depth study. In order to enable the reader to have a broader overview of this topic, the most important rulings of recent years are briefly summarised here.
The first in the 'series' was the Court's 2011 ruling in the case Pierre Fabre, where it was held that an absolute ban on Internet sales, where not objectively justified, constitutes a restriction by object that excludes the application of Block Exemption Regulation 330/2010.[11]
This was followed by the 2017 judgment in the case Coty Germanywhich (also) established the compatibility with Article 101 of a contractual clause
"prohibiting authorised distributors of a selective distribution system for luxury products aimed, primarily, at safeguarding the luxury image of those products from recognisably using third-party platforms to sell the contracted products via the Internet, where such a clause is aimed at safeguard the luxury image of these productsis established indiscriminately and applied in a non-discriminatory manner, and is proportionate to the objective pursued, circumstances which it is for the referring court to verify."[12]
The most recent decision Guess of December 2018, in which the Commission fined the parent company EUR 40 million for imposing a ban on retailers selling contractual products via internet or any other electronic or computer system, without the prior written consent of Guess same.[13]
4. Cross-selling within the network of selective distribution.
Article 4(d) of the Regulation prohibits "the restriction of cross-supplies between distributors within a selective distribution system, including distributors operating at different trading levels".
This provision gives members of the distribution network the freedom to sell to other members of the network; this is to allow, at least within a 'closed' system, maximum freedom of movement.
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[1] Consider the decision Grundig approved in 1985 by the Commission, which required the presence of "qualified personnel and an external service with the necessary technical expertise to assist and advise customers', as well as 'the technical organisation necessary for the storage and timely supply of purchasers'; 'presenting and displaying Grundig products in a representative manner in special rooms, separate from other departments, and whose appearance reflects Grundig's market image'.
[2] On this point, see PAPPALARDO, The Competition Law of the European Union, p. 409, UTET, 2018.
[3] Judgment Metro I25.10.1977 and Case C-31/80, L'Oréal/ PVBA. This orientation was also confirmed by the Commission's Guidelines No. 175, which state that "Selective distribution based on purely qualitative criteria is generally considered to fall outside the scope of Article 101(1) because it does not give rise to anti-competitive effects, provided that three conditions are fulfilled. First, the nature of the product in question must make a selective distribution system necessary in the sense that such a system must be a legitimate requirement, having regard to the characteristics of the product in question, to preserve its quality and ensure its proper use. Secondly, the choice of dealers must be made according to objective criteria of a qualitative nature established indiscriminately and made available to all potential dealers and applied in a non-discriminatory manner. Thirdly, the established criteria must not go beyond what is necessary"
[4] On this point cf. case Omega, Commission Decision of 28.10.1970 and BMW case of 23.12.1977.
[5] Case Omega, Commission Decision of 28.10.1970
[6] Vichy case, Commission decision of 27.2.1992
[7] "Quantitative selective distribution adds further selection criteria that limit the potential number of dealers more directly, e.g. by imposing a minimum or maximum level of purchases, fixing the number of dealers, etc."
[8] On this point see Bortolotti, Distribution Contracts, 2016, p. 720, Wolters Kluwer; Pappalardo, The Competition Law of the European Union, 2018, p. 405, Wolters Kluwer.
[9] In this regard, reference is made to what the Court of Justice stated in the case Metro-Saba IJudgment of 25.10.1977, at para. 27 ".Any sales system based on the selection of distribution points inevitably implies - otherwise it would make no sense - the obligation for wholesalers who are part of the network to supply only authorised retailers.
[10] With the new regulation 302/2018 on the CD. geoblockingregulation on measures to prevent unjustified geographical blocking and other forms of discrimination based on the nationality, place of residence or place of establishment of customers within the internal market. This regulation (mentioned here only briefly), aims to prevent unjustified geographical blockades or other forms of discrimination based directly or indirectly on the nationality, place of residence or place of establishment of customers: the regulation does in fact remove the blockade, but does not oblige customers to sell outside their own country or to have the same prices for the whole of Europe.
[11] Case Pierre Fabre, judgment of 13.10.2011
[12] Case Coty Germany, judgment of 6.12.2017.
[13] https://www.bbmpartners.com/news/La-decisione-Guess-della-Commissione-Europea-Una-prima-analisi
Can a manufacturer prevent its distributors from selling online?
When is it possible to block the online sales of distributors or members of one's own sales network? Active sales, passive sales, geoblocking... Let's have some clarity!
L'e-commerce is undoubtedly a tool with extraordinary potential: it makes it possible to address a very wide range of users, to target offers with great precision at well-defined customer categories, and for the end consumer, let's not forget, it is undoubtedly convenient!
In view of its potential, this tool must be used with great awareness by any entity wishing to operate in the e-commerce sector; a strategy must be carefully worked out marketingIt is necessary to take into account the logistical complexities involved and to comply with increasingly complex and binding regulatory requirements (think only of the privacycertainly made more complex following the entry into force of the GDPR).
Furthermore, given the transversality of the webthe use of e-commerce contributes significantly to making the increasingly transparent prices and this not infrequently clashes with the manufacturer's distribution strategies, often aimed at protecting the brand and creating a pricing policy that is as controlled as possible.
1. The European Commission's analysis of the impacts of e-commerce.
The European Commission recently carried out an investigation into the trade impacts that thee-commerce has on the market and consumers, concluded with the drafting of the "final report on the e-commerce sector enquiry."[1] Here are some insights into the conclusions reached by the Commission:
[Through e-commerce, price transparency has] increased [and] consumers are [...] able to immediately obtain and compare product and price information online and quickly switch from one channel (online/offline) to another."[2]
[...]
The ability to compare product prices between different online retailers leads to increased price competition for both online and offline sales[3] and alternative online distribution models, such as online marketplaces, have enabled retailers to reach customers more easily [...] with limited investment and effort."[4]
This analysis paints a very effective picture of the reality of sales online, leading increasingly to one:
- greater transparency on prices;
- easier to reach a very large customer base, even beyond the territorial limits possibly imposed by the distributor.
2. Can the manufacturer block the online sales of its distributors? Regulation 330/2010.
Aware of these risks, the manufacturer, in order to defend its strategy, often decides to impose limits on its distributors' use of this medium, prohibiting them from selling online (sometimes also requiring distributors to apply the same restriction to their buyers), or preventing them from selling online outside the territory assigned to them (on this subject see also The mixed system: when the manufacturer chooses to adopt both exclusive and selective distribution).
At this point, the question arises: can the manufacturer prevent its distributor from selling online?
To answer this question, one must start with theArticle 101(3) of the Treaty on the Functioning of the EU (TFEU). This rule ban agreements and concerted practices of enterprises "which have as their object or effect the prevention, restriction or distortion of competition within the common market"This prohibition includes agreements that prevent the distributor from selling to customers domiciled outside the territory.[5]
In any case, European legislation derives specific exceptions which are fixed in the Regulation No 330/2010 concerning the so-called '.vertical agreements', i.e. agreements for the distribution and supply of goods or services concluded between undertakings each operating at a different level of the production or distribution chain. This regulation must be interpreted and supplemented in the light of the Commission Guidelines (LGC), published on 20 April 2010, which, among other things, expand on the topic of restrictions on e-commerce.
The European legislation referred to above prohibits theArticle 4 of the Regulation agreements that prevent the distributor from selling to customers domiciled outside the territory. In any event, in order to prevent a manufacturer from dividing its network of distributors into different territories, it allows restrictions only on the so-called '.active sales"[6] in the exclusive territory or to the exclusive customer base of the supplier, while not allowing the so-called '.passive sales. "[7]
As for the online salesthe Guidelines (point 52) specify that they are generally to be regarded as "passive", with the consequence that, in principle, no distributor may be prevented from using internet to sell their products. In particular, it is made express prohibition to negotiate agreements whereby the distributor agrees to:
- redirecting consumers to the site internet of the manufacturer or other distributors with territorial exclusivity;
- interrupting transactions online of consumers following the ascertainment of their geographical area of residence through their credit card data;
- limit the proportion of total sales made via internet;
- pay a higher price for products intended for resale online compared to those for traditional outlets (para. 52 LGC).
It is therefore not possible to prevent a distributor or retailer from setting up its own site for sales onlinelet alone use digital platforms (e.g. Amazon, E-bay, Alibaba, etc.) for marketing.[8] The manufacturer can find its products online, supplied by the distributor or by the shop itself supplied by the distributor, without being able to prevent this process, let alone control it (on this topic see also article "Exclusivity clauses and vertical economic agreements in the European context: e-commerce and territorial exclusivity"by colleague Vittorio Zattra).
The distributor, by the way, will not be obliged to accept all orders from customers outside its territory: in order to avoid the risk that foreign customers might assume that the offer is directed at them, for the sole reason that they have visibility of the offer on their device, it is advisable to indicate directly on the site that the offer does not concern sales involving the delivery of goods abroad. This clause is also in line with the new regulation 302/2018 on the CD. geoblockingon measures to prevent unjustified geographical blockades and other forms of discrimination based on the nationality, place of residence or place of establishment of customers within the internal market.
This regulation (mentioned here only briefly), aims to prevent unjustified geographic blockades or other forms of discrimination based directly or indirectly on the nationality, place of residence or establishment of customers: the regulation in fact removes the blockade, but does not oblige customers to sell outside their own country or to have the same prices for the whole of Europe.[9]
3. Court of Justice rulings on online sales.
3.1. The Pierre Fabre Case.
However, the Court of Justice in the case Pierre Fabre C-439/09 decided that the absolute ban on the use of internet imposed by a manufacturer on a distributor, constitutes a restriction that is not in line with the provisions of Regulation 330/2010, provided that the manufacturer demonstrates that this prohibition does not is objectively justified.
One (other) question arises: when is such a restriction justifiable and to what extent?
3.2. The Coty Germany GmbH case.
The Court in its recent judgment of 6 December 2017, C-230/16 Coty Germany GmbH clarified that in a system of selective distribution[10] of luxury products, a manufacturer (in this case Coty) is authorised to impose a clause on its distributor allowing it to sell the products via internet, but on condition that such sales activity online is realised through an 'electronic shop window' of the authorised shop and that it is thus preserved the luxurious connotation of the products.
In that case, the Court decided that a clause preventing the dealer not so much from using internet to sell/promote the goods purchased from the manufacturer, but to market them through digital platforms such as Amazon and the like. This is because the quality of the products:
"results not only from their material characteristics, but also from the style and image of prestige that gives them an aura of luxury, because such an aura constitutes an essential element of these products in order for them to be distinguished by consumers from other similar products."
In conclusion, it can be said that the manufacturer/supplier, once it has authorised a distributor to handle its goods, may not prevent the latter from using e-commerce to sell them also beyond the pre-established boundaries, invading the exclusive territory reserved for other distributors, provided that the end customer's request can be considered as spontaneous and not specifically solicited by the distributor.
There is also the possibility for the supplier to impose, in any case, on its distributors certain quality standards for the presentation of products, or specific sales methods consistent with its distribution system, provided that these conditions do not directly affect the quantity of goods marketable via internet or on the prices practicable on that platform.
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[1] Report from the Commission to the Council and the European Parliament, Final Report on the E-Commerce Sector Inquiry, 10.5.2017.
[2] Id. No. 11
[3] Id. No. 12
[4] Id. No. 14
[5] On this point See Bortolotti, Distribution Contracts, Wolters Kluwers, 2016, p. 746 ff.
[6] The LGCs, paragraph 51, define active sales as: "active contact with individual customers, e.g. by mail, including by sending unsolicited e-mails, or by visits to customers; or active contact with a specific group of customers, or with customers located in a specific territory through advertisements in the media or via the Internet or other promotions specifically addressed to that group of customers or to customers in that territory.
Advertising or promotions that are only attractive to the buyer if they (also) reach a specific group of customers or customers in a specific territory are considered active sales to that group of customers or customers in that territory. "
[7] The LGCs, paragraph 51, define passive sales as: "the response to unsolicited orders from individual customers, including the delivery of goods or the provision of services to such customers. Passive sales are advertising or promotions of a general nature that reach customers within the (exclusive) territories or customer groups of other distributors, but which are a reasonable way to reach customers outside those territories or customer groups, for instance to reach customers within one's own territory.
General advertising or promotions are considered a reasonable way to reach these customers if it is attractive for the buyer to make such investments even if they do not reach customers within the (exclusive) territory or (exclusive) customer group of other distributors'..
[8] On this point see Stefano Dindo, E-Wine, Legal-economic aspects of wine communication and distribution online, G. Giappichelli Editore, p. 47, 2018.
[9] On this point see Stefano Dindo, E-Wine, Legal-economic aspects of wine communication and distribution online, G. Giappichelli Editore, p. 41, 2018.
[10] There is no definition of selective distribution, however the Metro judgement, Court of Justice, 25.9.1977, already indicates the criteria for its identification: a) the products must be products whose quality or technological content require a selective distribution system, which safeguards their quality and correct use; b) the choice of distributors is made according to objective criteria of a qualitative nature; c) the defined criteria must not go beyond what is necessary.