Selective distribution – EU – Vogel&Vogel

COMPETITION • EUROPEAN LAW • RESTRICTIVE AGREEMENTS

Article 1(e) of Regulation No 330/2010 defines selective distribution 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 unauthorized distributors”. Suppliers may either select resellers directly or simply appoint wholesalers or importers, who in turn select the resellers.

Given the limits to its anticompetitive effects, this type of distribution has always been the subject of favorable treatment by the regulatory authorities. Indeed, it is less harmful than an agreement reserving territorial exclusivity that compartmentalizes national markets. Moreover, the limitation of the number of resellers that selection entails is compensated by an improvement in the service provided to the end user.

Selective distribution, like exclusive distribution, limits the number of authorized distributors and their potential for selling. The system imposes a ban on resale outside of the network. Restrictions on sales relate to all sales to unauthorized distributors, with the only potential buyers being authorized resellers and final consumers. Unlike exclusive distribution, limiting the number of resellers in selective distribution leads to the application of selection criteria relating to the nature of the product and not to an allocation of territories. Selective distribution can be either qualitative or quantitative.

Qualitative selective distribution consists in authorizing distributors solely on the basis of selection criteria that are objectively necessary to the distribution of the product in question, such as the training of sales staff, the services provided at the point of sale, or the assortment of products sold. As a general rule, purely qualitative selective distribution is not caught by Article 101(1) TFEU because, provided that three conditions are met (the type of distribution is justified by the quality of the products, distributors are selected on the basis of objective criteria and the proportionality criterion is respected), it does not produce any adverse effect on competition.

However, the quantitative selection of candidates for entry to a selective distribution network is more restrictive insofar as other restrictions are added, such as the imposition of a minimum or maximum level of sales or a direct limitation on the number of authorized resellers. A certain amount of quantitative selection in a selective distribution network is, however, allowed. It can in effect be justifiable to limit the number of resellers in order to adapt the network to the conditions relative to the meeting of the supply and the demand. For a quantitative selection system to benefit from block exemption, the Court of Justice considers that the precise content of the selection criteria must be capable of being verified without it being “necessary for such a system to be based on criteria that are objectively justified and applied in a uniform and non-differentiated manner in respect of all applicants for authorization”.

The type of selection is of little significance below the 30% threshold, and the agreement benefits from the presumption of legality set out in the block exemption regulation on condition that it contains no black or red clauses. The presumption of legality only comes into play if authorized distributors can actively sell to each other and to final consumers. A restriction on active or passive sales to end users, professionals or consumers is prohibited by the regulation (Regulation No 330/2010, Article 4). Cross-supplies between network distributors must also be allowed. Distributors must remain free to buy the contract goods from other authorized resellers in the network, whether they are operating at the same or at a different level of trade.

According to the Commission, if a withdrawal of the exemption would be likely in respect of the cumulative effects of selective distribution networks, with some selecting solely qualitatively and others exclusively quantitatively, withdrawal would only apply to quantitative restrictions that directly limit the number of authorized distributors. In effect, more indirect types of quantitative selection that, for example, combine qualitative criteria and minimum purchase obligations are less likely to harm competition in the case of cumulative effects.

Selective distribution is lawful under Article 101(1), according to the Court of Justice, provided that “resellers are chosen on the basis of objective criteria of a qualitative nature relating to the technical qualifications of the reseller and his staff and the suitability of his trading premises and that such conditions are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion”. Selection criteria are effectively only objective insofar as they are not disproportionate when giving consumers what they need in terms of advice and service. The requirement of proportionality implies that such criteria are directly related to the nature of the product and vary according to its nature. Prior to the entry into force of the Vertical Restraints Regulation, which takes a more benevolent stance towards quantitative selection, the rule of reason only applied in the case of qualitative selection of resellers.

Today, quantitative selection can, below the 30% threshold set by the regulation, qualify for the block exemption. Where the system in question exceeds the 30% threshold set by the Block Exemption Regulation, it may qualify for an individual exemption. The courts have identified a number of restrictive clauses capable of being exempted.