Key facts about selective distribution contracts

The ingredients of development through selective distribution:

• A collection of products and/or services;
• Sold by selected distributors based on defined criteria.

Selective distribution regulations, which come from EU regulation n°330/2010 of the 20th April 2010, defines selective distribution as a “system of distribution in which the supplier agrees to sell the contractual goods or services, directly or indirectly, to selected distributors only based on defined criteria” and the “distributors agree not to sell these goods or services to unauthorised distributors within the territory reserved for operating this system” [1].

The selection criteria defined by the supplier / network head may be:

• “qualitative”, focusing in particular on:

• The quality of the distributor: qualifications, training, skills, experience, …
• The quality of the point of sale: location, surface area, layout and equipment (window display, depot, …)
• The quality of the service provided to customers: specific services that the authorised distributor must be able to offer to customers.

• “quantitative”: a defined and limited number of distributors. Case law considers in fact that setting out qualitative selection criteria is not unlawful in itself.

This development model is often used for distribution of luxury products – particularly perfume – as well as car distribution.

Remuneration: 

Just like any supplier, the network head is paid on the margin achieved between the cost price of the products and/or services and their sale price to distributors in the selective distribution network.

Advantages:

This means of development allows a supplier to sell products and/or services through a network of independent distributors keeping control over the brand image of the products and/or services while making sure that a certain level of quality is respected when they are resold to the consumer.

In its capacity as head of the selective distribution network, it may refuse to sell its products and/or services to any distributor that does not meet its pre-determined criteria.

Similarly, authorised distributors agree not to sell the supplier’s products and/or services to unauthorised distributors.

Furthermore, the selection criteria determined by the supplier must be observed by the authorised distributor for as long as it is a member of the network. Failure to observe these criteria will amount to a breach of contract which may give rise to termination of the selective distribution contract.

Some precautions are needed…

Refusal to sell to any distributor that does not meet the selection criteria – and who is thus not a member of the network – is liable to amount to a breach of competition law. 

Regulation EU n° 330/2010 provides some exemptions for selective distribution contracts. Consequently, particular attention must be given when drafting the contract.

Linkea can assist you with this drafting.

[1] Regulation EU n°330/2010