Freedom of choice: exclusive distribution versus quantitative selection - International Law Office

International Law Office

Competition - France

Freedom of choice: exclusive distribution versus quantitative selection

May 12 2011

Exclusive distribution
Selective distribution
The future


The Court of Cassation recently handed down two separate judgments that have made it possible to compare the respective merits of using exclusive or quantitative selective distribution systems in terms of a network head's freedom to choose distributors.

Exclusive distribution

Under an exclusive distribution agreement, the supplier agrees to sell its products to one distributor for resale in a particular territory and may prohibit each of its distributor from actively selling in other exclusive territories.(1) Traditionally, the French courts consider that a network head may freely choose its distributors in such an exclusive distribution system.(2)

The solution is easily explained. The principle of intuitu personae (ie, by virture of the other party's personality) is vital in exclusive distribution. It is therefore logical that the supplier choose its distributors. Economic efficiency also calls for such a system. As they must cooperate closely throughout the life of the contract, it is preferable that the supplier and the distributor understand one another and can work in a climate of trust without the supplier having distributors forced on it which it would not have chosen itself.

According to the EU rules on vertical restraints, exclusive distribution is exempted under the EU Block Exemption Regulation where both the supplier's and the buyer's market share each does not exceed 30%, even if combined with other non-hardcore vertical restraints.(3) It was exempted in the same way under the previous EU Vertical Restraints Block Exemption Regulation where the market share did not exceed 30%, and is also block exempted by the EU Motor Vehicle Regulation.

Insofar as exclusive distribution is exempted below the market share thresholds – subject to them containing no black or red clauses and meeting the general terms to qualify for block exemption – the law on anti-competitive agreements, whether European or domestic, can impose no further requirements relative to the choice of distributors.

One isolated judgment did seem to require the supplier to justify its distributor selection criteria,(4) but a close reading of the decision reveals that in fact, the case concerned a selective rather than exclusive distribution system.

As the issue has arisen before trial courts several times over the past few years, the legal community has been awaiting clarification by the Court of Cassation. In a judgment of March 1 2011(5) it upheld the decision of an appeal court which had "rightly expressed the principle of the free choice of exclusive dealer", while at the same time stating that if the supplier had set down selection criteria for its distributors, it would be bound to apply them, which was not the case in this instance and is never the case in a purely exclusive distribution system.

Therefore, it is now established that the supplier alone assesses the risks it may be taking by appointing a particular distributor over another, and that it need not justify that decision in an exclusive distribution system. But what is the situation for quantitative selective distribution?

Selective distribution

The issue of the extent of choice of distributors has arisen in matters of quantitative selective distribution, particularly in relation to the motor vehicle sector. Under EU Regulation 1400/2002 (the issues being the same under the general regulation), the block exemption will apply below the threshold for exemption where the quantitative selection is carried out on the basis of "specified criteria" directly limiting the number of distributors. Does a numerus clausus (ie, fixed number) defining the number of distributors and their location meet this definition? Until now, the majority of trial courts have answered in the positive, whereas the Court of Cassation has sometimes assessed the objective character(6) of the quantitative criteria and its uniform application,(7) with a certain amount of confusion with qualitative criteria. The question has once again been raised before the Court of Cassation and puts forwards two apparently incompatible theories:

  • For candidates wishing to become network members (in practice, former dealers which have been terminated and wish to become dealers again), a simple numerus clausus would be insufficient to refuse access to the network as, according to them, limiting the number of distributors and the absence of a distributor in a certain place should be objectively justified in economic terms. In their view, the numerus clausus is the result of the implementation of selection criteria.
  • For suppliers, quantitative selective distribution is automatically exempted when it is below the thresholds on the sole condition that it is based on criteria which directly limit the number of distributors and which are specified (ie, determined like a numerus clausus which constitutes a quantitative criteria by definition) and confirmed by the preparatory acts to the regulation(8) and most of the analysis carried out by EU law specialists. It is inappropriate to add on a further condition not required by the regulation or to demand a review of the reasons for the quantitative criterion and the legitimacy thereof.

Given these different interpretations, the Court of Cassation was reluctant to decide. In a judgment of March 29 2011, it referred the following question to the European Court of Justice (ECJ) for a preliminary ruling: what is meant by the term 'specified criteria' in Article 1(1)(f) of the Block Exemption Regulation for quantitative selective distribution?

The future

The future of quantitative selective distribution in Europe is now in the hands of the ECJ. To ensure legal certainty for this type of distribution system, it is hoped that the bizarre notion of adding on a condition where the regulation does not require it will be rejected. If this does not happen, economic operators with less than a 30% market share would be well advised to opt for exclusive distribution or a combination of exclusive and selective distribution, as the latter generally affords all of the advantages of quantitative selective distribution, without the disadvantages in terms of legal uncertainty as regards the freedom of choice of distributors. The combination of exclusive and selective distribution automatically benefits from exemption under the Vertical Restraints Block Exemption Regulation if it falls below the market share thresholds, and this extends to the distribution of new motor vehicles as of June 13 2013.

Endnotes

(1) Guidelines on Vertical Restraints pt 151.

(2) Court of Cassation, Commercial Div, April 7 1998, LawLex 200205121JBJ.

(3) Guidelines on Vertical Restraints pt 152.

(4) Court of Cassation, Commercial Div, Jan 25 2000, LawLex 200205274JBJ.

(5) LawLex 20110000370JBJ.

(6) Judgment of June 28 2005, Grémeau.

(7) Judgment of March 6 2007, Ferry.

(8) Commission Notice, OJEU, March 16 2002, C67116, pt 13; European Commission decision of October 28 1970, LawLex200400003314JBJ.

For further information on this topic please contact Joseph Vogel at Vogel & Vogel by telephone (+33 1 53 67 76 20), fax (+33 1 53 67 76 25) or email (jvogel@vogel-vogel.com).


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