Setting up a selective distribution network allows a supplier to choose its resellers on the basis of defined criteria, in order to preserve its brand image and ensure quality marketing. This mechanism, common for luxury, high-tech or cosmetic products, lies at the crossroads between contractual freedom and competition law. Poorly structured agreements can lead to sanctions for anti-competitive practices. Our firm, which regularly handles disputes in this area, offers an insight into the case law that has shaped this field. It is essential for a network head to understand the limits that must not be crossed in order to secure its sales channels, an issue that forms part of the wider framework of vertical restraints in competition law. For assistance with defending your interests in distribution network disputeslegal expertise is essential.
The legality in principle of selective distribution systems
Contrary to popular belief, selective distribution is not in itself prohibited by competition law. It is considered to be a form of 'non-price' competition, based on quality of service, which can be beneficial to the consumer. However, its validity is subject to strict conditions, largely defined by European case law and then adopted by the French authorities.
Metro I and II case law (conditions of legality)
The seminal *Metro* rulings of the European Court of Justice in 1977 and 1986 laid the foundations for the validity of selective distribution networks. To escape classification as an anti-competitive agreement, such a system must meet three cumulative conditions. Firstly, the nature of the product must justify a selection of dealers, for example because of its technical nature or prestigious image. Secondly, distributors must be selected on the basis of qualitative, objective and verifiable criteria, such as the qualifications of the staff or the layout of the sales outlet. Finally, these criteria must not be applied in a discriminatory manner and must not go beyond what is necessary to guarantee quality distribution.
Influence on French law (Conseil de la concurrence)
French law quickly adopted this pragmatic approach. The Conseil de la Concurrence, now the Autorité de la Concurrence, has consistently applied the "Metro criteria" to assess the lawfulness of networks. It examines whether the restrictions imposed on distributors are proportionate to the objective of preserving product quality and image. Today, this analysis is part of the more global framework established by Regulation (EU) 2022/720 on vertical restraintswhich offers a block exemption to numerous vertical agreements, including selective distribution, provided that the market shares of the supplier and buyer do not exceed 30 % and that the agreement does not contain any hardcore restrictions.
Objectivity in the selection of distributors
The cornerstone of the validity of a selective distribution network lies in the objective and qualitative nature of the approval criteria. The supplier cannot refuse a reseller on the basis of arbitrary considerations. Case law has gradually defined the contours of what is acceptable.
Professional qualifications (Vichy, Givenchy)
For certain products, the presence of qualified staff is a legitimate requirement. In the *Vichy* case, it was ruled that the marketing of dermo-cosmetic products could be reserved for pharmacists, because of their ability to provide informed advice. Similarly, for luxury perfumes, the "Givenchy" case law validated the requirement for a beauty consultant to assist customers. The aim is to ensure that consumers receive a level of service appropriate to the nature of the product.
Criteria relating to the sales area (enclosed space, shop window)
The environment in which the product is sold is another criterion frequently used, especially in the luxury sector. The courts have accepted the legality of clauses requiring a specific sales area, separate from other activities, or the presence of a shop window to showcase the products. However, these requirements must be justified by the need to maintain a prestigious presentation and must not be intended solely to exclude certain types of distributor in a disguised manner.
Compatibility of the sign with the brand image
A supplier is entitled to ensure that the signage and overall environment of the sales outlet do not damage the image of its brand. A shop whose positioning is clearly incompatible with the prestige of its products could legitimately be refused approval. However, this is assessed on a case-by-case basis, and the refusal must be based on tangible and objective factors, and not simply on a subjective perception of the unsuitability of the sign.
The principle of non-discrimination and quantitative selection
Even if the selection criteria are objective, they must be applied equally to all distributor candidates. Any difference in treatment must be justified. Limiting the number of distributors, or quantitative selection, is also viewed with increasing suspicion by the authorities.
Ban on discriminatory clauses and applications (Binon, Biotherm)
Case law, notably in the *Binon* and *Biotherm* cases, has penalised networks where the criteria, although apparently lawful, were in practice applied in a lax manner for some distributors and with extreme firmness for others. If a supplier admits resellers into its network who do not comply with the stated conditions, it can no longer use these same conditions to refuse a new entrant who does comply. Such a practice reveals that the real objective is not the quality of distribution, but a restriction of competition.
Quantitative selection: limits and exceptions (Rolex, Seiko)
Limiting the number of retailers in a given area in advance (quantitative selection) is a much more restrictive practice than simple qualitative selection. It is only allowed in very exceptional cases. Case law, particularly in luxury watchmaking cases such as *Rolex* or *Seiko*, has been able to validate it when the supplier demonstrates that it is essential to ensure sufficient profitability for its distributors, given the significant investments it requires them to make in the promotion and after-sales service of highly technical products. However, the burden of proof is heavy.
Exclusion of certain forms of distribution
Historically, network heads have often tried to exclude outright certain forms of sale deemed incompatible with their image, such as mail order or, more recently, online sales. Case law has tightly controlled these exclusions.
Prohibition of a priori exclusion (pharmacy, mail order)
A fundamental principle is that no form of trade can be excluded on principle. A distributor, whether a pharmacy, a department store or a mail-order salesperson, must be admitted to the network as long as it meets the objective qualitative criteria defined by the supplier. It is unlawful to refuse approval solely on the grounds that the applicant operates via a particular distribution channel.
Internet sales: specific rules and case law (Pierre Fabre, Coty, Stihl)
The issue of online sales has given rise to a great deal of litigation. The *Pierre Fabre* ruling in 2011 marked a turning point when it ruled that a clause imposing a general and absolute ban on internet sales was a hardcore restriction on competition. Subsequently, the *Coty* ruling in 2017 provided an important nuance: for luxury products, a supplier may prohibit its authorised distributors from selling on third-party platforms (marketplaces) that are not controlled by the distributor. The Court held that such a ban was proportionate to the objective of preserving the luxury image. The *Stihl* case confirmed this line for technical products requiring a physical demonstration. Thus, while a total ban is prohibited, restrictions aimed at controlling the conditions of online sales in order to preserve quality are permitted, as detailed in our analysis on vertical restraints specific to e-commerce.
Distributors' commercial freedom
Once approved, the distributor must retain a degree of commercial freedom. The selective distribution contract must not become a straitjacket that annihilates all autonomy. The main freedoms concern pricing policy and relations with other suppliers.
Pricing freedom and limits on fixed prices
It is a cardinal principle of competition law that authorised distributors are free to set their own resale prices. The network head may communicate recommended selling prices, but may under no circumstances impose minimum selling prices. Such a practice constitutes a hardcore restriction, depriving the agreement of the benefit of any exemption and exposing the company to heavy penalties.
Freedom to market competing products (brand clauses, minimum figures)
Suppliers cannot generally impose total exclusivity on their distributors by prohibiting them from selling competing products. Such non-competition clauses are very strictly regulated by European law. However, it is possible to require that a certain minimum sales figure be achieved with the network's products, or that competing brands not be promoted to the detriment of the supplier's brand. The balance is delicate, and clauses must be drafted very carefully to avoid being deemed excessive.
Freedom of retrocessions within the network
Sales between authorised members of the same selective distribution network, also known as retrocessions, must in principle remain unrestricted. Prohibiting a distributor from obtaining supplies from another member of the network is considered an anti-competitive restriction. These exchanges enable better stock management and promote internal competition (intra-brand), which benefits the end consumer.
Protecting selective distribution networks
A legal and well-structured network has the right to defend itself against sales by unauthorised third parties. The effectiveness and credibility of the system depend on its ability to remain watertight.
Watertightness and legality of the network
For a selective network to be considered legitimate, the supplier must demonstrate that it applies it consistently and actively combats parallel sales. If the supplier remains passive in the face of notorious unauthorised retailers, it loses its legitimacy to refuse new entrants or to impose constraints on its members. Watertightness is not just a right, it is also a condition for the validity of the network.
Action against distributors outside the network (unfair competition, trademarks)
The network head has a number of legal tools at its disposal for taking action against unauthorised resellers. The most common is an action for unfair competition. It can be brought if the third party has obtained the goods by fraudulent means (for example, by deceiving a member of the network) or if its sales methods damage the brand image of the products. In certain cases, where the third party's actions involve capturing the reputation and efforts of others, they can be analysed as economic parasitism. Action for trademark infringement may also be considered if the unauthorised reseller alters the products or their packaging, or if the resale undermines the original guarantee function of the trademark.
Setting up and managing a selective distribution network requires ongoing legal analysis to ensure compliance. For an in-depth analysis of your situation and tailored advice, contact our team of lawyers.
Sources
- Treaty on the Functioning of the European Union (TFEU), in particular articles 101 and 102.
- French Commercial Code, in particular Articles L. 420-1 et seq. on anti-competitive practices.
- 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.
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