COMPETITION • FRENCH LAW • RESTRICTIVE AGREEMENTS
According to the definition adopted by the French Court of Cassation, a selective distribution contract is one in which “the supplier covenants to supply one or several traders in a given sector that that supplier has chosen in accordance with objective, qualitative criteria, without discriminating and without unjustified quantitative limits, and in which the distributor is authorized to sell other, competing products”.
This type of agreement forbids suppliers as well as selected distributors from selling contract products to distributors who are not network members.
Although selective distribution has the potential to restrict competition within the meaning of Article L. 420-1 of the Commercial Code, it is subject to a favorable regime from the regulatory authorities, given its minimal anticompetitive effects. A set of criteria must be met for the distribution network to be declared lawful under the competition rules:
– resellers selected according to objective, qualitative or, if applicable, quantitative criteria;
– legal impermeability of the network, ensured by the prohibition imposed on the selected distributors of selling the contractual products to parallel resellers;
– freedom of resellers to set their own prices;
– maintenance of competition in the market concerned.
Quantitative selection is more likely to be caught by Article L. 420-1 of the Commercial Code since it directly limits the number of resellers. It adds another restriction to qualitative selection, such as a minimum or maximum sales amounts, or a direct limit on the number of authorized resellers. However, unlike the EU authorities prior to the entry into force of the Vertical Restraints Regulation, the French supervisory authorities had no hesitation in using the rule of reason to review quantitative selection, as long as it was economically justified. Further, use of the Vertical Restraints Block Exemption Regulation as a guide for analysis in national law should logically lead the court to accept the quantitative criteria more readily if the regulation exempts them where the supplier’s market share is lower than 30%.
Directly limiting the number of resellers may be justified when too many distributors would make distribution costs disproportionate and could increase the cost price. The number of outlets directly influences the cost of distribution and advertising, and makes procurement more complex. Most often, quantitative selection is indirect. It takes the form of specific clauses, such as stock obligations, minimum purchase or turnover obligations. The supplier can therefore require its distributors to present a representative selection of its products, to hold a complete range and to maintain sufficient stock to meet consumer demands. In order to control the establishment of new sales outlets, the network promoter often sets up an admission procedure that consists of putting all new applications on a waiting list. The management of this list must not lead to the unfair exclusion of distributors meeting the selection criteria. Finally, the quantitative limitation of the number of distributors may be based on local market factors or population size. According to the Paris Court of Appeal, while the reference to local distribution density in relation to the national average product distribution density is unacceptable, this is not the case with the population density rate or local market factors, which are objective criteria.
Qualitative selection must be justified by the nature of the product whose quality, correct use, or adequate distribution is to be preserved. Selective distribution only involves specific products, such as luxury or up-market products, or very technical ones. Brand image alone is not always a sufficient basis for selectivity. It must be shown that selective distribution is justified because of the properties of the product. Demands regarding quality distribution must however be proportionate; no mode of distribution may be excluded in principle by a selective distribution network organizer. Market specialization must remain within reasonable limits. Only an immediate environment which is not prejudicial to the product’s brand image may be required. The network promoter cannot require that the distributor reserve a minimum sales surface to the contracted products. Selection of the distributor may depend on his/her professional qualifications or those of the staff. In any event, the elements used in making a selection based on professional qualifications must be precise.
Objectively applying selection criteria assumes they are fairly precisely defined. In fact, a potential distributor can only verify the existence of criteria, and thereby assess the likelihood of being admitted to the network, when such criteria are clearly set. References to demands such as “the reputation and brand image of the store”, “top-end products”, “professional qualifications”, and “advice and sales services” in particular are too general and indefinite to meet the condition of objectivity. The same criteria must be applied to all distributors in a comparable situation with respect to marketing the contract goods. However, the supplier remains free to set the objective selection criteria that correspond to the quality of its products, which may differ according to the specificities of each distribution channel, and to approve the candidates of its choice. According to the Paris Court of Appeal, a refusal to approve a candidate does not, in itself, constitute a fault likely to incur the liability of the supplier, the latter being under no obligation to approve a candidate meeting the selection criteria because of the principle of contractual freedom. Moreover, such a refusal does not constitute an anticompetitive practice within the meaning of Article L. 420-1 of the Commercial Code. On the other hand, the a priori exclusion of any form of marketing, even if it meets the selection criteria, other than the channel for which distribution is reserved, constitutes a discriminatory restriction that is not proportionate to the needs of the distribution of the products in question. The exclusion of sales on the internet today provides the best illustration of the condition of absence of discrimination. According to the competition authorities, the de facto prohibition of online selling, imposed by the operator of a selective distribution network on its authorized distributors, constitutes a hardcore restriction that cannot be covered by the block exemption.
A selective distribution agreement may constitute an anticompetitive agreement when resellers lose their autonomy in setting prices or when the supplier requires its distributors to obtain its consent for cross-supplies within the network. Moreover, terms purporting to limit cross-supplies between distributors are blatant restrictions under EU law. In addition, while a ban on online sales in a selective distribution contract with respect to authorized distributors with a physical point of sale amounts to a restriction on active and passive sales, insofar as it necessarily has a restrictive purpose, the ban on resale on non-authorized websites or marketplaces has been accepted by the Court of Justice and subsequently by the French authorities.