Selective distribution

 

Author Definition

 

Definition

Selective distribution systems (SDS) consist of vertical agreements between a supplier and one or more distributors that (1) specify selection criteria which have to be met by undertakings/firms before they can be admitted into the SDS as ‘authorized distributors’, and (2) prevent the re-sale of the product to non-authorized distributors. Resale is only permitted to other authorized distributors or end consumers. The selection criteria may pertain purely to quality standards (‘qualitative SDS’), but in some cases also limit the number of authorized distributors overall and/or in any given area (‘quantitative SDS’). The selectiveness means some intra-brand competition is sacrificed, with a bias in favor of high quality over low prices.

 

Commentary

Where a supplier wishes to establish a distribution system that guarantees customers a certain quality standard for pre-sale services, such as pre-sale advice by trained staff or a luxurious sales environment, such wishes may be undermined by freeriding from discounters. This would lead to underinvestment in pre-sale services by other distributors. SDS impose the quality criteria contractually and close the system against non-autorized distributors to prevent freeriding. Accordingly, SDS restrict intra-brand competition with regard to price, but allow for quality distribution that could otherwise not be realized. Interbrand competition may then fill any remaining demand for no-frills, low-cost products. As a form of vertical non-price restraints, SDS are comparatively benign.

In the EU, a legal definition of SDS can be found in Article 1(1)(e) of the Vertical Block Exemption Regulation 330/2010 (‘vBER’). Purely qualitative SDS, i.e., those that fulfill the so-called Metro I criteria, do not even constitute a restriction of competition in the meaning of Article 101(1) TFEU (Metro v Commission (1977)). These criteria are today restated as follows: ‘[T]he organisation of a selective distribution network is not prohibited by Article 101(1) TFEU, to the extent that resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, that the criteria laid down do not go beyond what is necessary […].’ (Coty Germany v Parfümerie Akzente (2017) at [24]). The first requirement is that the characteristics (or the ‘nature’) of the product in question requires an SDS. This is typically the case where the restriction is necessary to preserve the quality of the product, to ensure its proper use (especially in the case of technical products), or to preserve the ‘luxury image’ or ‘prestigious image’ of a product. The second Metro I criterion is that the selection criteria for distributors must be objective, qualitative and applied in a non-discriminatory manner. The third criterion is that the qualitative criteria must not go beyond that which is necessary. If these criteria are fulfilled, the potential number of distributors is not limited; any undertaking fulfilling the criteria must be admitted into the system. For this reason, such purely qualitative SDS are not even considered to constitute a restriction of competition; while even these SDS limit intra-brand price competition to some degree, this is compensated by the fact that the SDS enables competition on the parameter “distribution quality” that would otherwise not be possible.

Where the Metro I criteria are not fulfilled — e.g., where the criteria add direct or indirect quantitative selection criteria— the restrictions on distributors constitute (intra-brand) restrictions of competition in the meaning of Article 101(1) TFEU. However, such SDS may still be block exempted by the vBER. This is the case where neither the supplier nor the distributor exceeds 30% market share on their respective markets, and where no ‘hardcore restriction’ is involved. In the case of selective distribution system, the most relevant hardcore restrictions that may make the vBER inapplicable are restrictions on passive sales and restrictions on active cross-sales to other authorized distributors or sales to end consumers.

In recent years one of the most controversial questions in the EU has been to what extent SDS may restrict their distributors from selling online. Pierre Fabre Dermo-Cosméthique v Président de l’Autorité de la concurrence (2011) seemed to make two statements: first, that ‘[t]he aim of maintaining a prestigious image is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1) TFEU’ (at [46]) and secondly, that a de facto prohibition of the use of internet sales by authorized distributors was a restriction by object and a hardcore restriction, thus making the vBER inapplicable. The first statement seemed flatly to contradict case law going back decades. In Coty v Parfümerie Akzente (2017), the Court clarified that this was a misunderstanding, and that it is a legitimate use of SDS where it ensures that ‘the goods are displayed in sales outlets in a manner that enhances their value, contributes to the reputation of the goods at issue and therefore contributes to sustaining the aura of luxury surrounding them’. Coty therefore sought to restrict Pierre Fabre to its facts (at [31]). The problem is that Coty itself is not entirely clear on the distinguishing factors. Coty could be read to make a distinction based on whether the product in question is a ‘luxury good’ (ibid. at [32]). However, SDS are not restricted to luxury goods, but can also be used for other branded products. This is a near-logical necessity: whether a product is considered a luxury product depends to a large degree on the ‘aura of luxury’ created by the distribution system; requiring the qualification as a luxury good to be a prerequisite for the introduction of SDS would be putting the cart before the horse. The better interpretation of Coty is that Pierre Fabre prohibits de facto prohibitions of internet sales as going beyond that which is necessary, while in Coty the clause in question allowed authorized distributors direct online sales via their own website or via third-party websites that were not recognizable as such, and only prohibited sales via third-party platforms such as Amazon or eBay; this latter restriction was considered not to amount to a hardcore restriction. Less than a week after Coty was handed down, a German court decided, however, in a case whose facts are located between the goalposts of Pierre Fabre on the one hand and Coty on the other, that prohibiting distributors from supporting the functionality of price comparison websites and preventing them from advertising on third-party websites amounted to a hardcore restriction under the vBER (Asics (2017)).

Where neither the Metro I criteria, nor the conditions for the block exemption are met, a selective distribution system may still qualify for exemption under Article 101(3) TFEU.

In the US, SDS are not usually treated as a separate antitrust category. As non-price vertical restrictions, they are subject only to a rule of reason, Continental TV v GTE Sylvania (1977). Those SDS that are purely qualitative in the EU sense are not usually even called vertical restraints in the US, and they are said to be ‘virtually per se lawful’ (Areeda & Hovenkamp 2017 at §1600b in fn 14 and accompanying text). Other SDS, in particular quantitative ones, may, depending on the restrictions agreed in the specific case, raise issues of territorial or customer limitations or single dealer appointments (Areeda & Hovenkamp 2017 at Ch. 16D and 16E).

 

Bibliography

Frank Wijckmans & Filip Tuytschaever, Vertical Agreements in EU Competition Law (3rd edn, Oxford University Press 2018), paras 9.14–9.48

David Bailey and Laura Elizabeth John (eds.), Bellamy and Child: European Union Law of Competition (8th edn, Oxford University Press 2018), paras 7.094–7.117

Joanna Goyder, EU Distribution Law (5th edn Hart Publishing 2011) Chapter 4

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law — An Analysis of Antitrust Principles and Their Application, Volume VIII (4th edn Wolters Kluwer 2017) Chapter 16

This article is being reviewed by the Editors of the Dictionary.

Author

Quotation

Florian Wagner-von Papp, Selective distribution, Global Dictionary of Competition Law, Concurrences, Art. N° 12220

Visites 36179

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Distribution system whereby a supplier enters into (vertical) agreements with a limited number of selected dealers in the same geographic area. Selective distribution agreements, on the one hand, restrict the number of authorised distributors. On the other hand, they prohibit sales to non-authorised distributors, which leaves authorised dealers only other appointed dealers and final customers as possible buyers. Selective distribution is almost always used to distribute branded final products. The possible competition risks are a reduction in intra-brand competition, the facilitation of collusion between suppliers or buyers and the foreclosure of certain type(s) of distributors, especially in case of cumulative effects of parallel networks of selective distribution in a market. Purely qualitative selective distribution is in general considered to fall outside the prohibition of Article 101(1) TFEU, provided three conditions are satisfied: First, the nature of the product in question must necessitate a selective distribution system. Secondly, resellers must be chosen on the basis of objective criteria of a qualitative nature. Thirdly, the criteria laid down must not go beyond what is necessary. © European Commission

See also Vertical agreement

 
A B C D E F G H I J L M N O P R S T U V