This rapid expansion brings several challenges to manufacturers and brands, including how to navigate distribution systems different from their American counterparts. For all the opportunity they offer, online marketplaces also provide an easy way for anyone who can obtain the brand’s products to sell them in a manner inconsistent with the brand’s standards. These unauthorised sellers often sell products without implementing any of the brand’s quality control measures, operate entirely free of any brand oversight, and make none of the investments in the brand that is critical to its success. Ultimately, these sellers damage the brand’s reputation with consumers and adversely impact the relationships with the brand’s authorized sellers.
Many brands grappling with these new market dynamics believe they have no recourse against unauthorised sellers in Europe. However, brands entering the European market can lawfully control the online sales of their products in Europe in one of a few ways:
- implementing a selective distribution system.
- implementing an exclusive distribution system.
- assigning an agent to sell the brand’s products.
European authorities have made clear that brands may sell their products through a selective distribution system that complies with European competition law, specifically Article 101 of the Treaty on the Functioning of the European Union (TFEU).
In such a system, all sellers must meet certain requirements, called selective distribution criteria. These selective distribution criteria themselves must be:
- legitimate – justified by the nature of the product or brand in question.
- objective – applied uniformly to all potential sellers.
- necessary – no more restrictive than needed to achieve the legitimate objective.
In addition to implementing compliant selective distribution criteria, brands must avoid using any “hardcore” restrictions in Europe. There are three primary categories of hardcore restrictions that are particularly relevant in this context:
- resale price maintenance.
discrimination against online sellers.
- prohibitions on cross-sales within the selective distribution system.
First, brands should avoid any pricing-related restrictions in Europe. Any restriction that directly or indirectly constitutes a fixed or minimum sale price is considered a hardcore restriction. Notably, unlike in the US, European regulators have determined that Minimum Advertised Price (MAP) policies are impermissible resale price maintenance tactics.
Second, brands may not discriminate against online sellers when establishing selective distribution systems. This requirement does not mean that online and brick-and-mortar criteria must be identical; rather, they must be “overall equivalent.” In other words, they must pursue the same objectives and achieve comparable results.
Third, a selective distribution system also must allow cross-sales between its members. Any authorised seller within the system must be allowed to purchase products from any other authorized seller in the system, regardless of whether they operate at the wholesale or retail level of trade.
Alternatively, although selective distribution will often be the best approach for companies seeking to protect brand equity in today’s European market, brands can also evaluate the potential for implementation of an exclusive distribution system or assigning an agent to sell products.
An exclusive distribution system involves appointing a single seller to cover a particular territory or group of customers. In this scenario, sellers can be prohibited from actively selling in other sellers’ exclusive markets. An agency sales relationship involves the sale of products through a bona fide agent, who legally does not exist independently of the brand and, therefore, does not invoke as many competition issues.
Once a brand has settled on its desired distribution strategy, it can begin sharing with its authorized seller(s) the various agreements and policies that detail the selective distribution criteria.
The brand should also begin monitoring and identifying unauthorized sellers online, and taking appropriate enforcement actions against those sellers that disrupt its distribution system. These actions can include cutting off the seller’s sources, inviting the seller to apply to become an authorized seller, or sending cease-and-desist letters to the seller, as appropriate. If none of these actions works, the brand can take escalated legal action against the unauthorized seller.
Regardless of which distribution strategy a brand chooses, one thing is certain: online marketplaces have totally upended traditional distribution models, and brands cannot continue to rely on “business, as usual, ” in this new eCommerce ecosystem in Europe.
Author: Daren S. Garcia, partner and co-chair, Vorys eControl