This article has been written by Rashmi Chandrashekhar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. The article has been edited by Smriti Katiyar (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
In today’s society, where the brand name is given more importance, there are a number of designers and brands for luxurious products. A distribution agreement is nothing but a contract or the agreement between a supplying company and another company, which markets and sells the products. Under the distribution agreement, the distributor gets the right to market and sell the products.
One of the important kinds of the distribution agreement is the selective distribution agreement which allows suppliers to appoint particular distributors as per the specific needs. This article will discuss the selective distribution agreement in detail, and specifically, reflect on the involvement of this agreement in the Givenchy case.
A distribution agreement which is also known as the is nothing but a contract between the distributor and the manufacturer, where the manufacturers allow the distributors to sell, market and make profit from such sales.
Usually, the distribution agreements will contain certain terms and conditions such as, a clause with regard to the territories, within which the distributor can sell the products, clause with exclusivity rights, reporting requirements etc.,
Types of distribution agreement
Some of the important types of distributive agreements are as follows:
- Intensive distribution agreement
- Selective distribution agreement
- Exclusive distribution agreement
These distribution agreements are well-known agreements in the international markets.
Intensive Distribution Agreement
Under this agreement, the manufacturers use many channels to distribute their products and to reach their target. The intention of the manufacturers behind using this agreement is, to make the product available in abundance and reach a large number of people throughout the territories, where the distribution is allowed.
The type of products that are generally distributed under the intensive distribution agreements are those that are used on a daily basis. Such as, the newspapers, some of the beverages etc,.
Selective Distribution Agreement
Under this agreement, the manufacturer distributes the products to few distributors and outlets are chosen in order to make the product available to the customers.
This method of distribution can limit the competition in the market. Some restrictions will be made on the distributors to sell the product to only the selected or approved distributors. The manufacturer or the supplier can impose certain restrictions and insist the distributor to follow certain criteria while distributing the products. Manufacturers or the suppliers of the luxurious products will usually enter into the selective distribution agreement.
Exclusive Distribution Agreement
Under this agreement, the manufacturer or the supplier of the product will authorize one distributor only in order to carry out the distribution of the goods or services, only within a definite territory. The distributor will be the sole authorized distributor for that particular manufacturer who sells only that particular product. Some of the high-tech companies enter into exclusive distribution agreements.
Selective Distribution Agreement
The concept of the selective distribution agreement is nothing but, a type of distribution system, wherein the supplier undertakes to sell the products or services to a specific distributor, who will be selected based on specific criteria, which will be mainly based on the quality, in order to protect their brand name and also to avoid the possibilities of reselling of the contracted products by the distributors.
The selective distribution agreement is commonly used for branded products, which are luxurious, durable and sophisticated products. This distribution agreement will usually be for a niche businesses. The selective distribution agreements mainly focus on achieving consistency in standard and the quality of the service provided by them to the outlets to which they sell their products. The margin which is applicable for the supply of the selective distribution agreements is higher than the other distribution agreements.
The width of the distribution channels under the selective agreements are usually low and have a limited number of distribution channels, which depends upon the geographical coverage, consumer criteria and the quality of the product.
The selective distribution agreements are usually used by the supplier in two categories, are for technical consumer products or for luxurious products. The technical consumer products are those products that require pre-sale advice and post-sale services, such as, desktops (PC’s) or home theatres etc. The suppliers of luxurious products, with prestigious brand names, prefer to use selective distribution contracts in order to protect their brand names in the market.
Criteria for selective distribution agreement
Based on the decisions of the European Union (EU) Courts, the European Commission, the qualitative selective distribution does not fall under Article 101 (1) of the Treaty on the Functioning of the European Union (TFEU) [Article 101 (1) :
Prohibition on the arrangements which: a. directly or indirectly fix purchase or selling prices or any other trading conditions, b. limit or control the production, market, technical developments or investments, c. Share markets or sources of supply, d. apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage or, d. make the conclusions to contracts subject to tie-in of supplementary obligations unconnected with the subject matter of the contract] due to the lack of anti-competitive effects, based on the fulfilment of three conditions, they are as follows:
- The product to be sold should be of that nature, which genuinely requires the selective distribution network.
- There must be no discrimination made while selecting the resellers or the distributors.
- That, the criteria shall not cross the limits or go beyond the necessity.
The logic behind the Selective Distribution Agreement
The Economic and Commercial Logic
The rationale behind using the selective distribution agreement is as follows:
- Preventing other retailers or distributors: When discounted retailers or any other distributor starts selling or distributing the products which require the selective distribution network, there will be huge damage caused to the manufacturers as the brand name will be hampered.
- Maintaining the brand name: In order to maintain the brand name and its exclusivity in the market, the products must be kept for sale in such an environment, this will enhance its luxury value and its looks. Thus, selecting the distributor or a retailer plays a vital role in maintaining the brand name.
- Creating the retailer’s incentives: The supplier’s incentive is to attract more customers by providing them with good products and services. Whereas, the retailer’s incentive is to attract maximum customers by providing them discounts on the products. Therefore, in the majority of situations, it is very much necessary for the suppliers to impose certain restrictions on the retailers, in order to achieve standard goals and from restricting them to sell the luxurious products for cheap prices.
Restrictions imposed on the retailers and distributors under the Selective Distribution Agreement
Some of the restrictions imposed by the suppliers on the retailers and distributors are:
- Restrictions on Resale Price Maintenance: The supplier restricts the developers or the retailers from determining the product’s resale value or the resale price. There will always be an apprehension in the minds of the supplier that the distributors or the retailers may fix a resale price, which may become a de-facto minimum price, which is prohibited under the section distribution agreement. The Resale price maintenance also covers some of the commercial strategies which may have a major effect on controlling the retail prices. The following are the important examples which constitute the resale price maintenance:
- Maintaining the margin for the distributors or the retailers.
- Fixing the maximum limit of discount rate which the distributors or the retailers may use.
- Keeping the check on the resale price of the competitors.
- Threatening or intimidating the buyer to purchase the product at the resale price.
- Pressuring the distributors and the retailers to deviate from the recommended discounting price.
- Territorial restrictions: The supplier under the Selective Distribution Agreement cannot impose any territorial restrictions on the retailers or the distributors, directly or indirectly.
- Supply of the products between the distributors: The supplier of the product shall not restrict one distributor to sell the product to the other distributor who works for the same network or is the distributor of the same product.
Givenchy’s selective distribution agreement case
Givenchy is a French luxury fashion and perfume brand, which hosts clothing, accessories and perfumes and cosmetic products. The House of Givenchy was founded in 1952 by Hubert de Givenchy. Givenchy is one of the luxurious brands with the distinctive quality of products chooses to enter into a Selective Distribution Agreement in order to maintain the competition along with the image of the brand in the market.
Facts of the case
Givenchy, being one of the main producers of luxurious cosmetic products, distributes its products within its common market with the help of its network of retailers which has been authorized by them and the authorized agents or the retailer’s acts as the exclusive agents in the other member states.
The notified authorizer’s network is usually based on the authorized retailer’s contract, which has been standardized by Givenchy. These standards that were set by the Givenchy in its Selective Distribution Contract were restricting the trade between the member states, restricting the competition in the market. The notified contract was also imposing certain restrictions on the retailers to resell the products that were covered under this contract to the customers only or to the other networking retailers, who are mainly selling Givenchy’s products. These restrictions which were imposed on the retailers and distributors were causing unhealthy trading in the market.
In this case, the decision was pronounced by the commission under Article 85(3) of the EEC Treaty (European Economic Community). This Treaty is exclusively designed to make sure that the members of this treaty do not impose any state barriers for conducting trade-related activities between the national markets.
Article 85(3) of the Treaty of the European Economic Community
Article 85(3): Improvement of the production or distribution and promotion of technological or economic progress.
This case confirms the principle, which was laid down in the case of YSL (Yves Saint Laurent) Perfumes by the Commission on 16th December, 1991. In this case, the marketing conditions of Givenchy, the skincare and the beauty products were defined. There was one clause in this case, which was challenged, i.e. the clause restricting the distributors from choosing the competing brands, wherein, the retailers or the distributors had the restrictions from selling a minimum number of competing brands, including the list which was made by the Givenchy. The majority of the companies, dealing with luxurious products or brands, were following the same practices.
The Commission was of the opinion that, this clause is affecting the market by limiting the access the distributors from getting the new retailers network, which in turn will restrict the intra-brand competitions along with that, it also discourages the new brands, which is intending to enter the market and are ready to compete with the other brands in the market.
Based on the opinion passed by the Commission, Givenchy deleted the clause, which restricted the retailers or the distributors from choosing the competing brands and amended that clause by replacing it with another clause, which gave freedom to the retailers and the distributors to choose to sell any other luxurious perfume brands, along with the Givenchy’s products.
The principles that were laid down in the YSL Case, which was confirmed in Givenchy’s case, are as follows:
- There must be an express recognition of freedom that has to be given to the distributors to fix their own retail prices.
- There terms and conditions with regard to cross-selling of contracted products between the retailers within the same member states must be liberalized.
- The clauses that impose strict restrictions on the distributors from selling the contracted goods to the other members who work for the same network have to be suppressed. i.e., The Clause which stated that, the sale outlets have to contain sufficient number of competing brands to reflect the image and reputation of the Givenchy Products, which affected the possibilities of the authorized distributors to have access to the selective distribution network which would have further resulted in overlapping of the contracts that are made by the competitors.
In a nutshell, selective distribution agreement is ever developing and much in this industry where fashion trends and branded products are evolving and people who choose to go for the luxurious branded products. The decision that was made by the Commission in Givenchy’s case, resulted in drastic changes in the market as it liberalized the strict terms and conditions which were imposed on the distributors and the retailers by the suppliers which discouraged the new suppliers from entering into the market and have free and healthy trade between the member states, without any hurdles and restrictions.
- Selective Distribution Systems Under The Light Of Coty Decision – Corporate/Commercial Law – Turkey (mondaq.com)
- Selective Distribution Lawyers Commercial Law Experts London (emlaw.co.uk)
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