Problems with Distributors: Protecting Your Brand, Selective Distribution Systems and Preventing Online Reselling

There has been an increasingly recurring question from our clients over the past year about the behaviour of their distributors. Most recently, a client experienced an explosion in sales due to the recent fast upward trend of online retailing during the Covid-19 pandemic. A small business suddenly turned into a business with a multimillion-pound revenue, and with that came a raft of new problems for the business.
Among those problems were what to do with distributors that were selling their products in ways which diluted their brand. For example, by selling on third-party platforms such as eBay and Amazon and providing a very sub-par after-sales service and product instruction.

Under UK and EU competition laws, preventing your distributors from selling your products however they like is technically prohibited. If you impose restrictions, you are harming competition in the market. Less competition in the market means, at least in theory, higher prices for consumers and less innovation. The raft of competition laws aims to protect and increase competition in markets and benefit consumers.

However, there are some circumstances in which you can restrict your distributors from doing certain things, including selling on third-party platforms like eBay and Amazon. In previous articles, we suggested the ability to do this may be coming to an end, but the Courts have now confirmed beyond doubt that it is possible, following the very important European decision in the case of Coty Germany GmbH v Parfümerie Akzente GmbH.

How to Police your Distributors through a Selective Distribution System

A Selective Distribution System is a lawful way of choosing your distributors, refusing to deal with distributors you do not want and is a system for how you police your distributors once chosen. You will choose a set of criteria for choosing distributors and how you wish to control the distributor’s behaviour. In practical terms, it is a suite of documents that contain all the terms and conditions that your distributors must sign to be chosen in the first place and how they must behave while working with you.

The documents need to be carefully drafted with your circumstances in mind. But, at a basic level, to create a lawful Selective Distribution System, you need to satisfy three basic conditions:

The products in question should be of a suitably technical or luxury nature. This seems like a narrow band of products, but previous case law shows that the European Commission has accepted such products as televisions, hi-fis, high-quality watches, perfumes, ceramic tableware, and newspapers as being capable of being protected.
The criteria for choosing distributors must not be excessive for the purpose. This means that the criteria you use for choosing your distributors must not go further than is necessary to achieve the objective. The kinds of criteria requirements that have been accepted by the Commission are things like ensuring your distributors provide after-sales service, that the way the products are displayed is suitable, that the staff are appropriately trained in the technical nature of the product and obligations to purchase minimum quantities or to stock the whole range of products.
The criteria for choosing distributors must be objective and not discriminatory. This means that once you set the criteria for choosing distributors, any distributor that meets those criteria should be allowed to join your distribution network. If a distributor applies to you and fails, you should also give reasons for the failure and identify what would need to be done to meet your criteria.

As examples, think of companies like Prada, Rolex, Tiffany, or Apple. Think about how their products are always displayed, the kinds of shops and buildings they are sold from, how the sales staff are trained and how good the after-sales service is. I do not know if any of those companies have Selective Distribution Systems, but they all do an excellent job of ensuring that wherever the customer buys the product from, the customer will always get a uniform and high-level brand experience. This ensures their brand is protected from dilution and that they remain competitive in their markets.

Restricting Online Sales on Third-Party Platforms Like eBay and Amazon

Many clients have issues with distributors selling products on third-party platforms like eBay or Amazon. The problem is that often these distributors will not be able to change the sales page to the product branding and will have to rely on eBay or Amazon’s branding and sales pages. The look and feel of that sales page has no relationship to the branding of the product that they are selling. It is a common problem in the luxury products market and most companies believe that third-party branding diminishes the luxury or prestige image of their products. In short, it makes their products look “cheap”.

Similar to telling your distributors that your products must be displayed in good lighting with appropriate décor, in bricks and mortar shops, for example, you should be able to enforce how your distributors’ sales pages look on the internet.

However, an absolute ban on all online selling is likely to be prohibited under law. You cannot stop your distributors from selling the products on their website, for example. However, if you intend to ban your distributors from selling on third-party marketplaces like eBay or Amazon, then following the German Coty case, this is generally now allowed through a Selective Distribution System. As always, your product should be luxury or technical in nature and the ban should have the object of preserving the luxury or prestige image of your product. For other products that are not a luxury or hi-tech product, an analysis of the ban and its purpose will have to be undertaken to see if the ban on online sales is lawful or not.

No Minimum Prices!

It is important to remember that setting up a Selective Distribution System does not mean that you have the freedom to impose anything you want on your distributors. Most importantly, you still cannot impose any kind of price obligations on your distributors. They must be free to sell your products at whatever price they like. You can only recommend a resale price; you cannot enforce it.
There are, of course, many nuances and other technicalities involved and not all products will be suitable for distribution through a selective network. Competition law is extensive and complicated. However, we have extensive experience in creating Selective Distribution Systems on behalf of clients with luxury or technical products.

*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.