EU Competition Rules for Distribution Agreements #7: Selective distribution

Why is competition law important in the distribution context?

Article 101(1) of the Treaty on the Functioning of the European Union prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e. your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities.

This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this seventh blog we discuss selective distribution.

What is it?

A selective distribution system is defined in the Vertical Block Exemption Regulation (‘VBER’) as:

“a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system”

Comparable to exclusive distribution systems, selective distribution systems limit the number of authorized distributors and resale opportunities. The degree of protection afforded to the distributor is the primary distinction between the two types of distribution systems. In an exclusive distribution system, the distributor is protected against active selling from outside its exclusive territory, whereas in a selective distribution system, the distributor is protected against active and passive sales by unauthorised distributors. For an explanation of the distinction between active and passive sales, we refer to our previous blog in this series about exclusive distribution.

Restriction of competition?

Purely qualitative selective distribution that satisfy the three conditions laid down by the Court of Justice of the European Union in the Metro judgment are not considered to restrict competition. In the Vertical Guidelines the three Metro criteria are summarised as follows:

1. the nature of the goods or services in question must necessitate a selective distribution system. This means that, having regard to the nature of the product concerned, such a system must constitute a legitimate requirement to preserve its quality and ensure its proper use. For instance, the use of selective distribution may be legitimate for high-quality or high-technology products (or for luxury goods). The quality of such goods may result not only from their material characteristics, but also from the aura of luxury surrounding them. Therefore, establishing a selective distribution system that seeks to ensure that the goods are displayed in a manner that contributes to sustaining that aura of luxury may be necessary to preserve their quality.
2. resellers must be chosen on the basis of objective qualitative criteria, which are laid down uniformly for all potential resellers and are not applied in a discriminatory manner.
3. the criteria laid down must not go beyond what is necessary.

If these criteria are fulfilled, it can be assumed that the restriction of intra-brand competition associated with selective distribution is offset by an improvement in inter-brand quality competition. For this kind of selective distribution systems, it is therefore not necessary to make use of the safe harbour provided by the VBER.

Assessment under the VBER

Qualitative selective distribution systems that do not fulfil the Metro criteria and quantitative selective distribution agreements can benefit from the exemption under the VBER, provided that the market shares of both the supplier and the buyer do not exceed 30% and the agreement does not contain any hardcore restrictions.

Within a selective distribution system, authorised distributors must be free to sell to end-users (both active and passive).

Under the VBER suppliers in a selective distribution system are entitled to impose the following restrictions:

• prohibit active or passive sales by authorised to unauthorised distributors;
• prohibit members of the selective distribution system operating at the wholesale level of trade to sell to end users;
• restrict the place of establishment of the members of the selective distribution system;
• require distributors to have one or more physical stores or showrooms as a condition for becoming an authorised distributor;
• restrict the distributors’ ability to sell components, supplied for the purposes of incorporation to a product, to customers who would use them to manufacture the same type of goods as those produced by the supplier.

A selective distribution agreement can still benefit from the safe harbour under the VBER when it is combined with other non-hardcore vertical restraints, such as a non-compete obligation not exceeding five years.

Key rules selective distribution

• Selective distribution systems that fulfil the Metro criteria (and do not contain any other restrictive agreements) do not infringe article 101(1) TFEU.
• Selective distribution agreements can benefit from the exemption under the VBER provided that:

• • the market share of the supplier and the buyer does not exceed 30%;
  • the agreement contains no hard-core restrictions.
• Selective distribution can be combined with other non-hardcore vertical restraints, such as a non-compete obligation.

FAQ’s

As a supplier, may I oblige my selective distributors to pass on the sales restriction that apply to them further “down the chain”?

Yes, in order to protect investment incentives, the VBER allows suppliers in a selective distribution system to restrict active or passive sales made by the direct buyers of authorised distributors to unauthorised distributors.

As a supplier, can I protect my authorised distributors against sales to unauthorised resellers from territories where selective distribution is not used?

Yes, under the VBER a supplier can prevent a distributor in an area where either exclusive or free distribution is used (as well as that distributor’s customers) from selling to unauthorised resellers in territories where selective distribution is used.

If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans, Sophia Wittkämper or Iris Graumans of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.