Selective Distribution Systems
Introduction
Selective distribution systems refer to a type of distribution system in which suppliers commit to selling the contracted goods or services directly or indirectly to distributors selected based on specified criteria, while the distributors commit not to sell the said goods or services to unauthorized distributors.[1] These systems limit the number of authorized distributors and their resale activities, and therefore inherently contain provisions that restrict competition. Therefore, competitive concerns such as reduction of intra-brand competition, closure of the market to certain types of distributors and facilitation of cooperation that restricts competition between suppliers or distributors, may arise. On the other hand, under certain conditions, these restrictions in selective distribution systems can benefit from the group exemption introduced by the Block Exemption Communiqué on Vertical Agreements No. 2002/2 ("Communiqué No. 2002/2").
Characteristics of Selective Distribution Systems
Suppliers may prefer selective distribution systems to ensure that certain criteria regarding the qualifications of sales personnel or the location of the sales points are met in order to establish and maintain brand image. Indeed, it is presumed that the sale of products classified as luxury or products that are technologically complex or require technical knowledge (durable consumer goods, cosmetic products, jewelry, motor vehicles, etc.) in places that meet certain standards and by individuals with technical knowledge will have a positive impact on consumer demand.
Especially in the marketing of branded products such as jewelry and perfume, where pre-sales promotion services are essential, the physical characteristics of the sales points and the knowledge and capabilities of the sales personnel are crucial. Suppliers who do not desire such products to be sold in unsuitable locations or by individuals lacking sufficient knowledge and abilities generally consider selective distribution systems suitable as a distribution network. In order for such products to reach end consumers effectively, it may be obligatory for the product to be sold only by members of the selective distribution system. Therefore, the reason for suppliers to restrict their distribution network through this distribution model stems from the nature of the relevant goods or services.
Communiqué No. 2002/2 and Selective Distribution Systems
Selective distribution agreements can benefit from the group exemption provided by Communiqué No. 2002/2 when the supplier’s market share does not exceed 30% and certain conditions are met. Below are some general examples of specific competition law restrictions examined within the scope of group exemption.
Restrictions on the Region or Customers to Which System Member Buyers May Sell the Contracted Goods or Services
These are defined as the restrictions on the region or customers to which the buyer can sell the contracted goods or services. However, “the sales of selective distribution system members to unauthorized distributors are restricted” constitutes an exception to the rule that arises from the nature of selective distribution systems. In other words, members of selective distribution systems can impose restrictions on the region or customers to which the buyer can sell the contracted goods or services.
Restrictions on Active or Passive Sales by System Members Operating at the Retail Level to End Users
The supplier may request that the relevant product be sold only by selective distribution members; however, system member buyers may not be subjected to active or passive sales prohibition regarding sales to end users. Selective distribution system member buyers can make active or passive sales to end users in any region, including the internet channel, otherwise the agreement cannot benefit from the block exemption.
Restrictions on Purchases and Sales by System Member Buyers
As known, vertical agreements containing certain restrictions cannot benefit from the group exemption provided by the Communiqué No. 2002/2. One of these restrictions is defined in Article 4(d) of the Communiqué No. 2002/2 as “preventing the purchase and sale among system members in a selective distribution system.” Accordingly, undertakings that prefer selective distribution cannot impose an obligation on system member buyers to make purchases exclusively from them. In other words, system members are not obliged to procure products from the supplier; they cannot be prevented from obtaining products from other member undertakings.
Restriction on Sales Points
It is possible for the supplier to prevent the relocation of sales points of system member buyers or the establishment of new sales points. Indeed, as clearly seen from the characteristics of the system, the operation of the system is directly related to the physical characteristics of the sales point. Therefore, the supplier is allowed to have a say in the locations of physical sales points and the establishment of new points.[2]
Especially in selective distribution systems, the supplier may impose an obligation on distributors to have at least one physical sales point. However, the purpose of this condition should not aim to push players which only have online sales (pure players) out of the market or restrict their sales. The conditions that can be imposed on internet sales should not directly or indirectly hinder the distributor’s internet sales. As such, the reasons for the conditions imposed on internet sales should be objectively concrete, reasonable, and acceptable in terms of enhancing the nature and quality of distribution, brand image, and/or potential effectiveness. In this context, the supplier may require the buyer to sell through “sales platforms/marketplaces” that meet certain standards and conditions.
Similarly, the supplier may establish certain conditions regarding the use of the internet as a sales channel. For example, the supplier may impose quality conditions for the internet site where its products are offered for sale or may require the provision of certain services to consumers who shop online. However, the purpose of these restrictions should not be to prevent the distributor from selling online and competing on prices.
Non-Compete Obligations
A supplier undertaking can require selected buyers to sell only its products and not sell any competing products. However, it cannot allow some of the competitors’ products to be sold in this system while preventing others from using this system. In other words, the non-compete obligation in a selective distribution system should either be imposed on all competing products or none of them. The Vertical Guidelines state that this condition aims to prevent certain suppliers from engaging in horizontal cooperation that restricts competition that excludes certain brands through selective distribution agreements.[3]
Conclusion
Selective distribution systems inherently contain various restrictions in terms of competition law. In these systems, often used for luxury consumer goods, suppliers can impose various restrictions on buyers in order to maintain brand image based on the qualifications of sales personnel and points. In cases where the supplier’s market share does not exceed 30%, the relevant agreements can benefit from the group exemption provided by the Communiqué No. 2002/2 under certain conditions.
- Article 3 of Block Exemption Communiqué on Vertical Agreements No. 2002/2.
- Launching of a new website by the system member buyer is not considered as establishing a new physical sales point.
- Vertical Guidelines, para 178.
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