Distribution agreements, and more specifically exclusivity clauses, are at the heart of many commercial strategies. They enable a supplier to organise the marketing of its products and ensure an effective presence on a market. However, these contracts are closely watched by the competition authorities, as they can easily drift into anti-competitive practices. The dividing line between a legitimate network organisation and an illegal cartel is often a fine one, largely shaped by case law. Understanding these nuances is essential if you are to secure your commercial relations, a process in which the advice of a lawyer with expertise in unfair competition and cartels can make all the difference. This article provides an in-depth analysis of the court rulings that have defined the framework for these practices, to complement our a comprehensive guide to vertical restraints in competition law.
The principle that exclusive distribution agreements are lawful
An exclusive distribution agreement is not in itself prohibited. Competition law, at both European and national level, does not condemn the nature of the agreement, but rather its purpose or its restrictive effects on competition. This pragmatic approach, which consists of assessing the real impact of the agreement on the market, is the cornerstone of the analysis. It is by examining this competitive balance that it is possible to determine whether the agreement is admissible. The modern framework for this assessment is defined in particular by Regulation (EU) 2022/720 on vertical restraintswhich establishes an exemption regime for many agreements.
Approach of the European Union (ECJ Mining Technique)
As early as 1966, in the seminal Mining TechniqueThe Court of Justice of the European Communities (now the CJEU) laid down a fundamental principle. For an agreement to be caught by the ban on cartels, it must have "the object or effect" of preventing, restricting or distorting competition. The Court thus rejected a formalistic approach that would have condemned all exclusivity agreements. Instead, it imposed a concrete analysis: not only must the content of the agreement be examined, but above all its economic and legal context. Is the agreement really likely to affect trade between Member States and harm competition? This is the question that has guided the analysis of the European authorities ever since.
French approach (Conseil de la concurrence's rule of reason)
French law has adopted a similar approach, often referred to as the "rule of reason". The Conseil de la Concurrence, forerunner of the Autorité de la Concurrence, has consistently held that exclusive distribution agreements are not unlawful as a matter of principle. To be prohibited, the agreement must not only contain restrictive clauses, but also have an identifiable negative effect on competition. The analysis is based on a "competitive assessment". The authority assesses whether the pro-competitive effects of the agreement (such as improving distribution, promoting innovation or benefiting consumers) outweigh its anti-competitive effects (such as closing off the market or raising prices). If the balance is positive or neutral overall, the agreement is deemed lawful.
Restrictions on distributor sales and absolute territorial protection
The most sensitive point in exclusive distribution contracts undoubtedly concerns the temptation for the supplier to guarantee its distributor total protection in its territory. While the basic idea is to motivate the distributor to invest, this protection cannot be absolute. The competition authorities see this as a blatant restriction, aimed at partitioning national markets and eliminating intra-brand competition.
Prohibition and EU case law (Consten, Grundig, Hasselblad, Dunlop)
The judgment Consten and Grundig in 1966 is emblematic. Grundig, a German electronics manufacturer, had granted Consten exclusive rights to distribute its products in France. The contract prohibited Consten from re-exporting the products, and Grundig's distributors in other countries were similarly prohibited from exporting to France. The Court ruled that this arrangement was illegal because it created absolute territorial protection. Its purpose was to prevent parallel imports, i.e. sales made in France by other European retailers who had obtained their supplies from Grundig. By preventing such imports, the agreement eliminated all competition for Grundig products in France and kept prices artificially high. This case law has been constantly reaffirmed, for example in the cases of Hasselblad (photographic equipment) or Dunlop (tyres), where complex monitoring and penalty systems were put in place to prevent cross-exports between distributors.
Condemnation and national examples (Magneti Marelli, Outils Wolf)
In France, this approach is applied with the same firmness. In the Magneti Marellithe Conseil de la Concurrence sanctioned a system for the distribution of car spare parts which, by means of bonuses and differentiated discounts, discouraged dealers in one country from selling to customers located in the territory of another dealer. Similarly, in the Wolf toolsIn France, the manufacturer of gardening tools was condemned for having included clauses in its contracts prohibiting its authorised distributors from selling products to other unauthorised retailers. The aim of this practice was to gain complete control over the distribution channel and effectively prohibit any sales outside the selective network, which amounts to a form of territorial protection.
The limits of prohibition: relative territorial protection and group policy (Honda, Viho)
However, the prohibition is not without its nuances. Competition law distinguishes between "active" and "passive" sales. A supplier may prohibit its exclusive distributor from actively soliciting customers outside its territory (through targeted advertising, canvassing, etc.). On the other hand, it cannot prohibit them from responding to unsolicited orders from customers outside their exclusive zone. This is known as "relative" territorial protection, and is generally accepted. Case law Honda has, for example, penalised practices which, under the guise of prohibiting active sales, in reality resulted in the blocking of passive sales. Another important limitation was clarified in the Vihowhich concerns "group policies". The Court held that where subsidiaries are wholly controlled by their parent company and have no commercial autonomy, they form a single economic entity. In this case, the prohibition on one subsidiary selling in the territory of another is not an agreement, but a simple internal division of tasks within the same group.
Distributors' pricing freedom and fixed prices
One of the fundamental objectives of competition law is to ensure that prices result from the free interplay of supply and demand. Any practice by a supplier to dictate the resale prices of its distributors is therefore examined with particular suspicion. Distributors must remain free to set their own selling prices to end consumers. On this subject, it is useful to consult our article dedicated to setting prices to avoid the pitfalls of resale at a loss and fixed prices.
Ban on minimum/fixed prices and case law (Honda, Mercedes-Benz, Volkswagen)
Imposing a minimum resale price or a fixed price on a distributor is one of the most serious restrictions in competition law. It eliminates price competition between resellers of the same brand (intra-brand competition), which directly harms the consumer. Case law is consistent on this point. There have been numerous cases in the automotive sector. The European Commission has sanctioned Volkswagen for requiring its Italian dealers not to sell cars below a certain price to customers from Germany or Austria. Likewise, Mercedes-Benz has been condemned for taking part in a cartel with its Belgian dealers aimed at limiting the discounts granted to customers. Imposed prices are not always written into the contract. They may be the result of pressure, threats of termination, late delivery or bonus schemes that provide a strong incentive to comply with a "recommended price".
Legality of maximum and recommended prices
Conversely, a supplier has the right to communicate 'recommended' resale prices or to impose 'maximum' resale prices. The idea is that these practices can be beneficial to the consumer, by combating any excessive prices charged by a distributor who enjoys a local monopoly. However, this permission is strictly regulated. The recommended or maximum price must not in practice become a fixed price. If the supplier exerts pressure or puts in place economic incentives (such as linking discounts to compliance with the recommended price), the authorities will consider this to be a disguised fixed price and the practice will be condemned.
Distributor selection and the principle of objectivity
In principle, all producers are free to choose with whom they wish to contract. Setting up a selective distribution network, where only retailers meeting certain criteria are approved, is a common and legitimate commercial practice. It is justified in particular for highly technical or luxury products that require a special sales environment or high-quality after-sales service. However, this freedom of choice is not absolute and must respect the principles of objectivity and non-discrimination.
Developments in case law on the choice of dealers (Seita)
French case law, notably in the Seita (tobacco distribution), clarified the conditions for the validity of selective distribution networks. To be lawful, such a network must be based on qualitative selection criteria, which are necessary to preserve the nature of the product. These criteria must be objective, i.e. based on the professional qualifications of the retailer, the characteristics of his outlet or the quality of his services. They must be defined uniformly for all potential applicants for approval and must not go beyond what is necessary. For example, requiring the presence of staff with specific technical training is an acceptable quality criterion for a complex product.
Discriminatory application of criteria
The most contentious issue is the application of these criteria. A supplier cannot use them as a pretext to arbitrarily exclude certain distributors, particularly those known for their aggressive pricing policy or those who sell mainly online. If an applicant meets all the objective qualitative conditions defined by the supplier, the latter must in principle approve it. A refusal to approve or a termination of contract based not on failure to meet the criteria, but on a desire to exclude a player for commercial reasons, would be considered a discriminatory and anti-competitive practice. Proving such discrimination can be complex and requires a detailed factual analysis of the exchanges between the parties.
Non-competition and exclusive purchasing agreements
Non-competition or exclusive supply clauses are common in distribution contracts. The former prohibits the distributor from selling competing products, while the latter obliges it to source a given product exclusively from its supplier. These clauses may be justified to protect the know-how passed on or to ensure that the distributor concentrates its efforts on the brand. However, they can also have the effect of foreclosing a market, which can be likened to practices involving abuse of a dominant position if the supplier is a major player.
Restrictive effects of individual agreements (tobacco, tachographs, phonograms)
A single agreement of this type can be anti-competitive if it is entered into by a supplier with a large market share. By tying a key distributor with an exclusivity clause, the supplier can deprive its competitors of essential access to the market. Case law has, for example, examined such effects in various sectors such as tachographs for heavy goods vehicles or the distribution of phonograms. The analysis focuses on the effect of 'foreclosure' of the market: do the supplier's competitors still have sufficient and realistic opportunities to sell their products to end consumers despite this exclusivity?
Cumulative restrictive effects (Delimitis, Langnese-Iglo)
The risk most often analysed is that of "cumulative effects". In many markets (such as beer or ice cream), it is common for most suppliers to impose exclusivity clauses on their distributors (cafés, sales outlets). Taken in isolation, each contract may seem insignificant. However, all these parallel contracts together can create a "network effect" that makes it extremely difficult for a new competitor to enter the market. Case law Delimitis (brewery contracts) established a two-stage method of analysis: firstly, to examine whether the market is genuinely foreclosed by the presence of numerous similar agreements; secondly, to determine the significant contribution of the supplier's contract in question to this foreclosure effect. The case of Langnese-Iglo (ice cream) is a famous application of this principle, where the Court confirmed that Unilever's network of exclusive contracts prevented small ice cream manufacturers from gaining access to points of sale and therefore to consumers.
Case law on exclusive distribution agreements shows a constant search for balance between contractual freedom and the protection of competition. The analysis is always factual and depends on the economic context of each agreement. For a company, navigating these complex waters without the assistance of a professional can be risky. The consequences of a poorly drafted agreement can range from the nullity of the clause to heavy financial penalties. To ensure that your distribution agreements are secure and compliant, contact our firm for a personalised analysis.
Sources
- Article 101 of the Treaty on the Functioning of the European Union (TFEU)
- Commission Regulation (EU) No 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.
- Book IV of the French Commercial Code, in particular Articles L. 420-1 et seq.
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