Case law overturned: refusal of approval in a selective distribution system, even when candidate fulfills selection criteria, is not a restrictive agreement neither a civil tort (including in qualitative selective distribution).

We are pleased to send you enclosed an important judgment from the distribution division of the Paris Court of Appeal, which has overturned the case law on refusals of authorization and is very favorable to the heads of selective distribution networks (I). The judgment also provides a welcome clarification on the scope of a recent position of the Court of Cassation on the applicability of the principle of good faith to the refusal to examine an application for authorization after termination of the contract (II).

On the refusal to authorize under ordinary tort law liability:
The Court held that:

  • In law, the requirement of good faith does not impose, on the head of a distribution network, the determination of a selection process based on objectively defined and fixed criteria, or the implementation of those criteria in a non-discriminatory manner;
  • The rule, relating to the extent of the obligation of good faith in any distribution network, does not distinguish according to type of network:

This is the first very important contribution of the judgment. Following the Fiat / Catia judgment of the Court of Cassation (27 March 2019, LawLex19420), the question arose as to whether the solution of that judgment on the freedom of network heads to authorize or reject a candidate under contract law was limited to quantitative selective distribution or covered all distribution networks including qualitative selective distribution.

That Court of Cassation judgment held that:

“On the first ground, taken in its first branch: – In view of Article 1382, now 1240, of the Civil Code, together the principles of contractual freedom and freedom of trade and industry; Whereas by stating that the refusal of authorization of the company Catia is a tort of the company FCA and ordering the latter to pay the former compensation, the judgment, after establishing that the company FCA was at the head of a quantitative selective distribution network, declares that the “supplier” is required, from the pre-contractual stage, to respect its general obligation of good faith in the choice of its co-contracting partner and concludes that the network head must select its distributors on the basis of basis of defined and objectively fixed criteria and apply them in a non-discriminatory manner.

By ruling thus, whereas the requirement of good faith does not impose, on the head of a distribution network, the definition and the implementation of such a selection procedure, the Court of Appeal violated the text and principle referred to above”.

Legal commentators were divided on the issue even though many considered that second paragraph which no longer refers to the type of network, was of general application.

The decision in Mercedes / Garage de Bretagne clearly settles the question: the supplier’s discretion to authorize in civil contract law extends to all forms of distribution, whether or not the candidate meets the selection criteria without it being necessary to include in the civil law analysis elements of competition law which must be the subject of an independent assessment.

Refusals to authorize under competition law

The Court noted the following:

  • In law, the anticompetitive practice alleged by [the repairer] cannot be classified as a concerted action or a restrictive agreement within the meaning of Article L. 420-1 of the Commercial Code unless it is established that the parties have freely consented to prevent, restrict or distort competition ;
  • These circumstances were not demonstrated in view of the elements presented by the [head of the network]
  • “it is not because the [eventually authorized] Group has, as a distributor and repairer of the network [X], an establishment in 21 towns in France, that it proves, solely due to the disputed refusal to authorize, its implicit agreement with the [head of the network ‘s desire to give it “an absolute monopoly in the official repair of vehicles [of the brand] in the Angers area“
  • Although the [applicant] claims that the refusal of authorization it has suffered is not an isolated act and alleges ‘that it was concurrent with the refusal [of the head of the network] against [another repairer] ] after terminating his authorized repairer contract in identical circumstances’, there is no evidence in the 19 exhibits produced by the appellant to support this assertion”

Important case law in competition law has thus been overturned. Until now, the distribution division of the Court of Appeal considered that the law on restrictive agreements applied ipso facto to refusals to authorize even if at a later stage it considered that it had generally no anticompetitive effect and was not sanctionable (see CA Paris, 5-4, 20 February 2019, LawLex19230, 27 March 2019, LawLex19403). That case law stemming from the Mazda / Palau judgment (CA Paris, 5-4, 23 January 2019, LawLex1980) posed a risk to networks. It is now no longer relevant, and the negative aspect of Mazda case law has gone: to fall under the scope of competition law, it is the refusal to authorize itself which must be the subject of an agreement with a member of the network. Otherwise, it is a unilateral decision outside the scope of cartel law.

The decision is entirely justified both in fact – the candidate having brought numerous unfounded suits against the head of the network and illegitimately used the logo of the brand post-contract -, and in law, providing clear legal remedies making it possible to defeat repeated repairer applications from terminated dealers.