This book provides a wide-ranging review of the European rules relating to distribution: exclusive purchase and exclusive supply, exclusive and selective distribution, motor vehicle distribution, franchises, commercial agents.

French Distribution Law

The Macron Law of 6 August 2015  added a new Title IV - “Commercial distribution networks” to Book III of the Commercial Code. The provision is applicable to relations between distribution networks and retail stores within the network and is intended to harmonize the duration of all the contracts concluded between the parties, to make contracts indivisible and to revise the system of rules governi …

Do Articles L. 341-1 and L. 341-2 of the Commercial Code apply to selective distribution?

According to the traditional definition by the 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 the 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” . The principal effect of such agreement is to forbid suppliers as well as selected distributors from selling contracted products to distributors who are not network members. The French courts have applied the same criteria to control the lawfulness of quantitative selection . This approach is in contradiction with EU law, which has deeply evolved further to the coming into force of the new generation regulations exempting vertical restraints. These regulations, which gave for the first time a legal definition to selective distribution, provide a different assessment of the criteria depending on whether they are qualitative or quantitative. Qualitative selection is based on criteria that cannot be met by all distributors, whilst quantitative selection depends on selection criteria that directly limit the potential number of dealers .

French positive law now tends to conform with the line of the EU case law since the Paris Court of Appeal recently considered that “it is for the supplier only, who is free to determine its development strategy, to decide on the size opportunity of its network and the desirable geographic location of that network […]; in effect, no national or EU law or regulation may impose on the grantor to give economic or other justifications for the list of locations of its distributors” . In other words, quantitative criteria do not follow the same logic as qualitative ones: they only need to be defined without it being necessary to control that they are well-founded, justified or objective. The definition of quantitative criteria has been the subject of lively debate in litigation and French case law has still not settled the matter once and for all. Those differences of interpretation have led the Court of Cassation (by judgment of 29 March 2011) to refer a question to the European Court of Justice for a preliminary ruling on the interpretation of the term “specified quantitative criteria” . Must the supplier justify the economic or geo-economic reasons for the criteria it has set or can it, more reasonably, simply lay down specific criteria which limit the number of distributors? The Court of Justice has chosen the second option. The term “specified criteria” in relation to a quantitative selective distribution system means criteria the precise content of which may be verified. In order to benefit from the exemption, it is not necessary for the criteria to be objectively justified and applied in a uniform and non-differentiated manner in respect of all applicants for authorization . The Court of Cassation has, on referral, aligned itself to that position .

Suppliers may directly select retailers  or only designate wholesalers or importers, in charge, in turn, of selecting retailers. Selective distribution contracts are therefore contracts between a supplier and retailers and/or wholesalers, or even between wholesalers and retailers.

Cass. crim., 3 November 1982, LawLex201000000442JBJ.

Cass. com., 28 June 2005, LawLex200500006663JBJ, regarding motor vehicle selective distribution; See, also, which extend the conditions required for qualitative criteria to quantitative criteria: CA Paris, 29 November 2007, LawLex200800000358JBJ: “if the quantitative condition opposed by Cartier to organize its distribution network is not unlawful per se, that undertaking should select distributors on the basis of defined criteria objectively set and applied without discrimination vis-à-vis all potential resellers”.

Guidelines on Vertical Restraints, par. 175.

CA Paris, 2 December 2009, LawLex200900003589JBJ, which confirms T. com. Bordeaux, 8 February 2008, LawLex200800000186JBJ.

Cass. com., 29 March 2011, LawLex201100000709JBJ.

Case C-158/11 Auto 24 SARL, Judgment of 14 June 2012, LawLex201200000961JBJ.

Cass. com., 15 January 2013, LawLex201300000035JBJ.

Case 26/76 Metro v Commission [1977] ECR I-1875, LawLex200200004119JBJ, which recognized that manufacturers are entitled to prevent wholesalers from selling to end-users, and to reserve distribution to retailers; Commission Decision No 85/616/EEC of 16 December 1985, Villeroy & Boch, LawLex200400002436JBJ, reserving to retailers the sale to end-users.

Definition.

Selective distribution arose from the challenging of the limits of territorial exclusivity attached to concession agreements. Firstly, the sale of products under favorable conditions does not necessarily imply exclusivity which, moreover, is liable to be caught by the competition rules. Consumers may also wish for a large choice of products within the same store in order to compare the brands available.

In parallel, owners of brands with a strong reputation like to control the distribution of their products, in particular for luxury or high-tech goods but the sale of only their own products on a market which is not very concentrated on the supply-side does not necessarily make it possible to amortize the distributor's distribution costs. A selection of distributors and sales outlets thus ensures the efficient distribution of their products and the preservation of their image. In effect, luxury goods may suffer from being too widely marketed. Their value in the users' eyes therefore presupposes that they are not distributed as ordinary staples. Moreover, high-tech goods must be distributed by competent sellers, in particular to ensure the after-sales service.

Selective distribution would appear to be the ideal distribution method to conciliate selling to the greatest number of people and the protection of the brand image. It also valorizes distributors who may, vis-à-vis their customers, use the advantage of having the manufacturer's authorization, which acts as an additional guarantee for consumers since it shows the professional competencies of the person authorized. Distributors may use the brand they sell, for example, on their store sign. They also usually benefit from preferential terms such as quality rebates .

Although selective distribution is described like exclusive distribution as a limited form of distribution, it is different insofar as it does not give the distributor territorial exclusivity  and does not impose brand exclusivity, unlike exclusive distribution which implies the granting of a territory in which it is almost always linked to brand exclusivity in practice. Selected distributors may therefore sell competing products , and suppliers may supply distributors located in the same trading area. Selective distribution is also different from franchises since it does not imply any provision of original know-how.

CA Paris, 5 July 1991, LawLex200200002445JBJ; Cass. crim., 30 November 1992, LawLex200200000300JBJ.

CA Paris, 24 September 1990, LawLex200200005797JBJ; Cass. com., 27 April 1993, LawLex200200005989JBJ.

Competition Council decision No 93-MC-03 of 30 March 1993, LawLex201000000453JBJ: an action by a network of flower transfer in a dominant position which is intended to favor the members of the network who have committed themselves not to simultaneously belong to one or more networks, characterizes an abuse of dominant position; No 98-D-35 of 16 June 1998, LawLex201000000452JBJ.

Usefulness.

The modern economic analysis of vertical restraints has tried to classify the lessons derived from experience on the advantages of selective distribution. It confirms that the choice of a limited number of distributors selected on the basis of a qualitative and/or quantitative criteria allows suppliers to ensure that their products are distributed under optimal conditions in line with the brand image of the product.

It has thus been demonstrated that if a distributor is not encouraged to offer additional services to consumers, it will be inclined not to provide them. The additional service theory, developed in particular by Telser, shows that selective distribution is a way of encouraging distributors to provide consumers with specific services and the necessary advice due to the technical nature and image of the products. According to the information asymmetry theory, selective distribution sets up profit-sharing mechanisms for distributors who are members of the network in order for them to pass on to the network leader information on customers' preferences that they would not give in a non-incentive distribution system. Likewise, it provides an opportunity to reward an increase in the quality of the service rendered by distributors, which generates additional sales for the supplier. In the absence of any incentive to maintain or enhance quality, distributors would only sell at the lowest distribution price possible to the detriment of the overall sales of the network and their own level of sales.

The provision of additional services by distributors, compliance with quality criteria and passing on information to the network leader entail specific distribution investments and costs inherent in selective distribution. If resellers who are not members of the network could sell the contract goods which are subject to selective distribution, they would take advantage of all positive externalities induced by the network without being subject to the investments borne by its members. Selective distribution thus implies the protection of the network against free-riding. It is also necessary to prevent a product from being trivialized and losing value, which would lead consumers to snub it. This analysis has been taken up in the Guidelines on Vertical Restraints according to which resale price maintenance may be justified by the provision of additional services and the prevention of free riding .

Guidelines on Vertical Restraints, 2022/C 248/01, pt 197.

Economic analysis of selective distribution.

The Macron Law of 6 August 2015  added a new Title IV - “Commercial distribution networks” to Book III of the Commercial Code. The provision is applicable to relations between distribution networks and retail stores within the network and is intended to harmonize the duration of all the contracts concluded between the parties, to make contracts indivisible and to revise the system of rules governing post-contract non-compete clauses. 

Article L. 341-1 of the Commercial Code provides that “all contracts concluded, on the one hand, between a natural person or a legal person governed by private law grouping traders together, other than those referred to in Chapters V and VI of Title II of Book I of the present code , or providing those services referred to in the first paragraph of Article L. 330-3, and on the other hand, any person operating, on its own behalf or on behalf of a third party, a retail store, having as their common purpose the exploitation of this store and containing clauses likely to limit the operator's freedom to carry out its commercial activity provide for a common end date”. The provision harmonizes the duration of contracts and makes those contracts legally indivisible: the termination of one of the contracts in question results in the termination of all of them. 

Further, Article L. 341-2, lays down the principle that “any clause having as its effect, after the expiration or termination of one of the agreements binding the trader to the distribution network, the restriction of the trader's freedom to carry on his commercial activity, shall be deemed unenforceable”. It does however contain a derogation for clauses which fulfill four cumulative conditions based on the provisions of the vertical restraints regulation. Those clauses must relate to goods or services which compete with the contract goods or services; be limited to the premises and land from which the trader has operated during the contract period; be indispensable to protect the know-how, which is secret, substantial and identified, transferred by the supplier to the trader in the context of the contract; be of a duration not exceeding a period of one year after expiry or termination of one of the agreements referred to in Article L. 341-1. 

The poor drafting of the provisions gives rise to a number of questions of interpretation especially with regard to their applicability to selective distribution networks. The amendment at the origin of the new section  purported to remedy the issues revealed in Opinion No 10-A-26 of the Competition Authority relative to contracts with independent  traders affiliated to retail food distribution groups  and to “strengthen competition in the large-scale distribution sector by facilitating the switch by independent stores to other chains” . The legislation which was eventually adopted is not limited to the food retail distribution sector. However the  application of Articles L. 341-1 and L. 342-2 to selective distribution is doubtful. The contracts in question must include “clauses likely to limit the operator's freedom to carry out its commercial activity”. But, selective distribution contracts which are purely qualitative or which combine qualitative and quantitative selection do not include any other restrictions on the activity of the distributor than the prohibition of resale to non-approved third parties, which is inherent to such contracts, and do not contain an exclusivity clause.

If the courts nevertheless find that the reform does apply to exclusive distribution agreements, what would the effect of the new provisions be on ongoing contracts? Does the common deadline necessarily mean mandatory recourse to fixed-term contracts? The Constitutional Council does not seem to think so  since it has declared the provisions in question to be constitutional provided that they “allow the contracting parties the freedom to fix the common duration and maturity of all the contracts binding them and to provide for their tacit renewal”. Presumably then there is nothing to prevent the conclusion of open-ended contracts. The principle according to which all contracts are tied to each other is an undeniable source of uncertainty. In cases of networks containing several brands and/or several activities, such as sales and after-sales, will the reorganization of one of them, terminate the entire network?  Does a termination for fault justify the termination of all the contracts concluded between the parties even if they still wish to pursue the others? Unfortunately Article L. 341-2 has extended the scope of the rules governing post-contractual non-compete clauses to cover those “having as [their) effect, after the expiration or termination of one of the agreements binding the trader to the distribution network, the restriction of the trader's freedom to carry on his commercial activity”. Preemption and priority clauses, criticized in Opinion No 10-A-26, would appear to be directly affected. And what about confidentiality or non-solicitation clauses? The lack of clarity here is all the more regrettable in that the derogation provided for in section II will not apply to selective distribution agreements that, in most cases, do not transfer specific know-how.

The last question relates to whether Articles L. 341-1 and L. 341-2 are in line with EU competition law. Currently, virtually all vertical agreements are consistent with European competition law and, where they are not, they are covered by BER No 330/2010 due to having a market share of below 30% or are able to benefit from an individual exemption. Can the Macron Law, the stated objective of which is the strengthening of competition in the distribution sector , add further conditions to those required under the vertical restraints regulation without violating the principle of the precedence of European Union law?

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Law No 2015-990 of 6 August 2015 pour la croissance, l'activité et l'égalité des chances économiques (for the promotion of growth, activity and equality of economic opportunities) OJ of 7 August 2015, 13537.

The provision refers to collective stores of independent traders and mutual guarantee companies. It also excludes lease agreements the duration of which are governed by Article L. 145-4 of the Commercial code, partnership agreements and civil law, commercial or cooperative partnership agreements.

Amendment No 1681 tabled by François Brottes.

Competition Authority Opinion No 10-A-26 of 7 December 2010.

Explanatory Statement (exposé des motifs) of Amendment No 1681.

Constitutional Council decision No 2015-715 DC of 5 August 2015.

See Explanatory Statement of Amendment No 1681, above, and the observations of the government presented to the Constitutional Council according to which “the legislator is pursuing a general interest objective by favoring competitive economic public policies”.

Selective distribution is a particularly efficient and balanced system of distribution. It allows for a combination of the extensive dissemination of products and a guarantee of quality in terms of distribution and brand image. This type of distribution has however been hindered by the boundless favor given by the courts to internet selling, in particular on online marketplaces. The preservation of the network against parasitic sales from operators outside the network is often very difficult and challenging in practice. However, the activity of marketplaces, which is not necessarily conducive to a presentation of selective products consistent with their brand image and tends to multiply points of sale contrary to the coverage intended by the supplier and fitting the economic coherence of the network, has long been privileged in the case law.

The most recent decisions, enshrined in the latest exemption regulation, have been able to avoid some of these pitfalls though and have adhered to the legal and economic fundamentals of selective distribution.

French Distribution Law

168. Do Articles L. 341-1 and L. 341-2 of the Commercial Code apply to selective distribution?

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168. Do Articles L. 341-1 and L. 341-2 of the Commercial Code apply to selective distribution?

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