DISTRIBUTION

-

Why distribution agreements ? Distribution v. direct sales (crossborder or with representative office/establishment)
Practical reasons
Commercial reasons (eg efficient marketing)
Financial reasons (eg less capital)
Legal reasons (advantage of a separate entity, etc …)
NB. for ‘direct investment’, see Ch. 8
Vice-versa: why do business buyers buy domestically rather than
import ?
FORMS OF DISTRIBUTION

-
Forms of distribution (general):
Sales representative = employee with an employment contract (receives
wage plus commission)
-
Distributorship (« concessionaire »): distributor itself buys and resells ;
chooses in principle its price for selling; difference of price is his income
-
Franchising: basically a specific form of distributorship, see infra.
-
Commercial agency: agent sells or buys in the name of and on behalf of the
principal (see infra forms of agency); principal determines the price;
income of the agent = commission on sales; manufacturer has more control
over agents than over distributors, and is also more liable.
-
Alternative: «commission agent » (acts in his own name for the principal)
-
Occasional intermediary
FORMS OF DISTRIBUTION

National law contains protective rules for distributors & agents. But
sometimes the weaker party is the (small) supplier dealing with big
distributors (esp. when the distributor has stipulated exclusivity).

Beware of labour law
in many European countries the principal of an employer may be jointly
liable for payment of the employees of that employer
Comp. dispute in the US whether franchisor is to be qualified as joint
employer of the employees of the franchisee (following a 2015 NLRB ruling
in Browning-Ferris)
-
DISTRIBUTORSHIP


-
-

-
General characteristics: a concession to (re)sell with an obligation for the
distributor to buy and for the supplier to supply/sell to the distributor; often
further obligations related to resale, marketing etc.
To be distinguished from sales contracts taking place within this framework
Conflict of law rule:
In the Rome-I-Regulation Art. 4 (1) f: choice of law, subs. country of the
distributor
Often mandatory rules in the country of the distributor , e.g. Belgian
Statute of 1961 (now in Econ. Law Code) (for concessions on Belgian
territory). They will be applied by courts of other countries only insofar as
they render performance in the country of performance illegal (Art. 9, 3
Rome-I)
Substantive law:
No ‘global’ uniform law (DCFR contains a model in Book IV E) (uniform rules
in OHADA)
national law: usually general contract law + some specific rules
DISTRIBUTORSHIP

-
-
Drafting a distributorship agreement (for competition law restrictions , s.
further):
Parties. Quid in case of change of parties ? Of change of control ?
Possibly the general purpose (common intent)
Which products. Including new products ? Adapted products ?
Territory. Exclusivity ? May supplier sell directly in the territory ? May the
supplier himself sell (directly) online ?
May the distributor sell competing products ?
Non-competition after termination of the distributorship ? (see below
restrictions under competition law)
Obligations of confidentiality
Inform and assist the supplier in case of violation of suppliers IP rights
Obligations concerning publicity and promotion
Terms concerning the modalities for sale/supply to the distributor: price,
period for delivery, payment modalities, warranties, possible technical
assistance, …
DISTRIBUTORSHIP

-
-


Drafting a distributorship agreement (cont.):
Terms concerning the modalities of (re)sale; fixation of resale price
usually contrary to competition law
Minimum sales quota ?
Obligations concerning stocks, after sales service, qualified staff,
etc.
Duration of the distributorship: definite period / indefinite period
with a certain period of notice to terminate & grounds for immediate
termination
Effects of termination (indemnities, stock, etc.)
Choice of law, choice of forum
Overriding mandatory provisions on the effects of termination, e.g.
Belgian statute of 1961, next slide
Other continental systems: abusive termination. Eg Italian C.Cass.
In Renault Italia spa
DISTRIBUTORSHIP



a)
b)
c)

Overriding mandatory provisions on the effects of termination in the Belgian
Distributorship Statute of 1961 (now integrated in the Economic Law Code
2014)
Scope of application: 3 conditions
Exclusive, quasi-exclusive, serious investments
Belgian territory
Indefinite period or after 3 x definite period
Effects of termination except for fundamental breach by distributor:
Termination giving notice with a reasonable period (or compensation
corresponding to that period); length of period not determined by statute
Equitable additional compensation for:
goodwill (remaining to supplier),
investments profiting to supplier, and
severance (costs incurred for employees dismissed).
Jurisdiction of Belgian courts (but: Brussels-I-Reg. has priority if defendant
resides in the EU or the designated court is in the EU) (for Arbitration, see
Chapter on arbitration)
Termination of distributorships contracts under Belgian law
notice period granted by courts
.
Number of distributorships
20
18
16
14
12
10
8
6
4
2
0
Notice period granted by Courts
FRANCHISING

-
-
-
-
General characteristics: special type of distributorship, but not necessarily
goods, also possible for services, combined with a licensing contract
Right of a franchisee to sell goods or services under the distinctive sign of
the franchisor; make use of the uniform sales presentation; exploit the IP
rights and know-how of the franchisor; and/or commercial & technical
assistance by franchisor (eg collective publicity and promotion)
Sometimes a mere license to manufacture using the IP rights of the
franchisor: such contracts are contracts for transfer of technology (see next
chapter)
Thus always at least a (license of) bundle of IP rights and the use of know
how of the franchisor by the franchisee
Whether or not territorially exclusive (contract will contain provision on
possible competition or prohibition of competition) (better clarify whether
franchisor may itself sell online)
In exchange, franchisor stipulates « front money », royalty and/or
consultancy fee; plus usually a duty of the franchisee to make investments
FRANCHISING



-
-
Conflict of law rule: Rome-I Art. 4(1)e: choice of law, subs. country
of the franchisee;
sometimes overriding mandatory provisions
Substantive law:
Many statutes impose a precontractual duty to disclose on the
frachisor, often in the form of a PID or DPI (precontractual
information document). Eg Belgium (in the Economic law code),
France, Sweden, Italy, Art. 3 ff. Uncitral Model Franchise Disclosure
Law 2002, …
New French law 2015 (Loi Macron) provides that termination implies
termination of related contracts (other than the lease)
See also infra competition law
Further International models: ICC model international franchising
contract; DCFR IV E.
IP RIGHTS

Intellectual property rights are ‘territorial monopolies’ (national or
multinational)
Especially relevant for distribution are:
 Trademarks
 Designs (in the US either trade dress protection or design patent)
 Geographical indications & appellations of origin
 See also in next ch.: patents, know how, copyright.
 Trade name
 Domain name
- ICANN & WIPO have developed a Uniform Domain Name Dispute
Resolution Policy (UDRP) (and in 2014 an Uniform Rapid Suspension
(URS) system)
Trademarks

Trademarks and Designs:
-
« national monopolies » (except Benelux: unitary for 3 countries);
-
alternative: Union Trade Mark (EUTM) (until March 2016 Community Trade
Mark), now Reg. 2015/2424) and Community Design: unitary and largely
autonomous rights. Administered by the EUIPO in Valencia (formerly named
OHIM)
-
In between: single application leading to a bundle of national rights:
- For trademarks: Madrid Protocol. Possible for the ‘EC’ (EU minus Malta)
or for the OAPI (African Intellectual Property Organisation)
- Idem for design rights: Hague Agreement concerning the international
registration of industrial designs, version Geneva 1999.
Trademarks
National trademark law to some extent harmonised by EU Directives.
Revision under way; unregistered trademarks not protected, unregistered
designs enjoy some protection
 International harmonisation by the Singapore Trademarks Treaty 2006.
 The TRIPS Agreement 1994 (Trade Related Aspects of Intellectual Property
Rights ) (see next chapter) contains a minimum standard of protection to
be granted by all member states (WTO) for a number of IP rights, incl.
Trademarks: Minimum protection must be available as determined by the
Paris Convention (1883 as amended 1967):
Protection on registration, with a min. of 7 years, renewable an indefinite
number of times
Registration can be challenged in a procedure
If protected: right to prevent any use that would result in a likelihood or
confusion (presumption of likelihood or confusion in case of an identical
sign)
Combating counterfeiting, see next chapter.
 « Exhaustion principle »: trademark is limited by EU case law to its specific
object > right is in principle exhausted when put on the market in the EU
with consent of trademark holder (see infra).

Geographical indications & AO

-
The TRIPS Agreement 1994 also contains a minimum standard of protection
to be granted for Geographical indications: the Minimum protection as
determined by the Paris Convention (1883 as amended 1967)
incl. procedures to prevent the use of misleading geographical indications
There also is a WIPO Convention of 1958: Lisbon Agreement for the
Protection of Appellations of Origin and their International registration (28
ratifications) (revised Treaty Geneva 2015):
- member states may notify indications protected in their territory to WIPO;
WIPO will register them and notify them to the other member countries of
the system and those can issue refusals of protection with a certain time
period

DISTRIBUTION &
COMPETITION LAW

Contracts will often restrict possibilities of competition for one or
both parties. This may conflict with competition law.

As soon as the interstate commerce is affected, EU competition
law applies (if not, agreement may still be forbidden under
national competition law)

Basic rules: Art. 101 ff. TFEU (formerly 81 EC Treaty)
DISTRIBUTION & EU
COMPETITION LAW





Art. 101 TFEU
1. General prohibition:
The following shall be prohibited as incompatible with the internal
market:
all agreements between undertakings, decisions by associations of
undertakings and concerted practices
which may affect trade between Member States and
which have as their object or effect the prevention, restriction or
distortion of competition within the internal market
2. Effects: next slide
3. Exceptions to prohibition: next slide
DISTRIBUTION & EU
COMPETITION LAW
in particular those which:
 (a)
directly or indirectly fix purchase or selling prices or any other
trading conditions;
 (b)
limit or control production, markets, technical development, or
investment;
 (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;
 (e)
make the conclusion of contracts subject to acceptance by the
other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject
of such contracts.
DISTRIBUTION & EU
COMPETITION LAW

Effects of prohibition

Art. 101 TFEU (2): Any agreement or decision prohibited pursuant
to this article = automatically void.

Nullity does not exclude a right to compensation from one party
against another: ECJ C-453/99 Courage/Crehan

Possible liability against third parties: ECJ C-295/04, Manfredi /
Lloyd Adriatico Assicurazioni
DISTRIBUTION & EU
COMPETITION LAW
101 (3): The provisions of paragraph 1 may, however, be declared
inapplicable:
 in the case of any agreement or category of agreements between
undertakings, any decision or category of decisions by associations
of undertakings, any concerted practice or category of concerted
practices,
 which contributes to improving the production or distribution of
goods or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit,
 and which does not:
(a) impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition
in respect of a substantial part of the products in question.

EU & NATIONAL
COMPETITION LAW



-
-
Relationship EU competition law / national competition law:
reform in force May 1, 2004 (Regulation 1/2003).
As to substantive law (see art. 3 Reg. 1/2003):
national competition law adapted to EC competition law;
national competition law only relevant for practices with merely
insignificant influence on trade
As to competent authorities: in principle parallel (art. 4 & 5 Reg.
1/2003)
National authorities have full competence to act (including
application of the exemptions of art. 101 (3) TFEU) (ex-81 (3)
EC)
EU Commission may decide to tackle the case itself (with priority
over national authorities)
“European Competition Network” (ECN) for cooperation
EU COMPETITION LAW

-
-
Reg. 1/2004 has abolished the notice to the EU Commission (see
Art. 1)
The EU Commission does no longer give a negative clearance (it
can ex officio make a declaration of inapplicability of Art. 101
TFEU (ex-81 EC), see art. 10 Reg. 1/2003)
National authorities cannot grant a binding clearance.
Agreements and practices presumed to be not contrary to 101 (1)
or in accordance with para (3):
1° “De minimis”: Commission Notice 25 June 2014 (next slide)
2° Block exemptions + additional guidelines (infra)


Interpretation of “effect on trade”: Commission published
Guidelines in 2004
EU COMPETITION LAW
Prohibition of Art. 101 does not apply in case of minimal effect: “De
minimis” Commission Notice 2014 (new version) + Guidance on
interpretation of restriction of competition “by object”:

Agreements etc. are presumed not to be contrary to Art. 101 when:
1° in case of agreements between non-competitors: if the market share held
by each of the parties to the agreement does not exceed 15 % on any of
the relevant markets affected by the agreement. This does not apply to
the “hardcore” restrictions defined in Art. 11 (and corresponding to art. 4
of the Block exemption, see further).
2° in case of agreements between competitors: if the aggregate market share
held by the parties to the agreement does not exceed 15 % on any of
the relevant markets;.
3° in case of network effects, presumption only for market shares under 5 %
(eg distribution of beer)

The new Notice 2014 does no longer cover agreements which have as
their object the prevention, restriction or distortion of competition within
the internal market.

Notice is not binding for Courts, only for the Commission itself (ECJ nr. C226/11, Expedia)

EU COMPETITION LAW

-
Exemptions by application of Art. 101 (3) TFEU:
History: ECJ in Pronuptia accepts franchising under conditions
Collective or “Block” Exemptions by EU regulations or national measures:
presumption that Conditions of art. 101 (3) TFEU are fulfilled
For “vertical agreements” since 2000 a single general Regulation (Reg.
2790/1999) replaced in 2010 by Reg. 330/2010: the “VBER”
(applicable since 1 June 2010 on new contracts and 31 May 2011 on
existing contracts; applicable until May 31, 2022);
specific Regulations for some sectors, esp. Reg. 461/2010 for car
distribution, ended 1 June 2013 (general regulation now applies)
(for “horizontal” agreements, s. next chapter)
-
Next to the Regulation, the Commission has published “Guidelines on
Vertical restraints” (Guidelines 2010 on Regulation 330/2010)
-
Individual exemptions are abolished since May 1, 2004 (if no block
exemption applies, enterprise thus has to evaluate itself whether it thinks
the conditions of Art. 101 (3) TFEU are fulfilled)
VBER
Conditions for the block exemption for vertical agreements:
-
Applies only to vertical agreements in the definition of Art. 1, i.e. vertical
agreements concerning the sale of products and services; agreements
also dealing with other obligations not related to such sales are not
exempted on the basis of this Regulation.
-
4 Conditions for the exemption:
1° Market share threshold in Art. 3: market share held by either party
(supplier AND buyer) < 30 % of the relevant market on which it
sells/purchases the goods or services (relevant market defined in art. 7)
2° Turnover threshold of 50 Mio. in case of associations (art. 2 (2))
3° Not on the black list of hardcore prohibitions of art. 4 (next slide)
4° No clauses from the black list of art. 5 (certain forms of noncompetition clauses): (1 a + 2) (1b + 3) (1 c)
-
-
-
- Individual withdrawal of exemption possible by EC Commission (art. 6)
VBER
Conditions for the block exemption for vertical agreements (cont.):
black list of hardcore prohibitions of art. 4: i.e. restrictions of
(a) the buyer's ability to determine its sale price (except maximum
price)*, (b) the territory the buyer may sell, except in 4 cases where
restriction is permitted (i-iv) – distinction between “active sales” (may be
restricted under i) / “passive sales” (may not be restricted unless ii, iii, iv)
(c) sales to end users at the retail level of trade**
(d) cross-supplies
(e) the sale of components as spare parts to end-users
* This favours intra brand competition. Restrictions not always forbidden in the US:
SCotUS 28 VI 2007 in Leegin Creative Leather Products. In the EU, the Guidelines
give examples where price restrictions are allowed under 101 (3).
** Eg forbidding internet sales: C-439/09 Pierre Fabre Dermo-cosmétique. Before that
judgment, the EU Commission accepted (Guidelines no. 54) the no-logo-clause
(the buyer may not use an online platform bearing the logo of a third party such
as the platform organiser), but this clause is probably no longer possible.
EU competition law &
trademarks

-
Cfr. Supra:
1° the « exhaustion principle »: trademark is limited by EU case law to its
specific object > right is in principle exhausted when put on the market in
the EU with consent of trademark holder (eg ECJ C-119/75 in Terrapin; ECJ
C-16/03 Peak Holding).
- 2° But vertical agreements are permissible under certain conditions.
> The exhaustion principle does not apply in permissible selective distribution
systems insofar as control is necessary to guarantee the origin and quality
of the goods. Case law has accepted this basically only in 2 cases
Pharmaceuticals;
Top end luxury goods (ECJ in C-59/08, Copad/Christian Dior).
-
In other cases, it is sufficient that they were put on the market with the consent of
the holder and the holder can not invoke against a third party that the first buyer or
licensee has not respected the conditions for resale stipulated by the holder.
COMMERCIAL AGENCY
General characteristics: independent (no employee)
Task: negotiate and possibly conclude contracts in the name of a principal
(for commission agents: in their own name on behalf of the principal)


-
-
-
Conflict of law rule: distinguish the different relationships :
Internal relationship agent-principal (contract if agency or mandate): RomeI Reg.: choice of law subs. residence of the agent
Whether the act of the agent is attributed to the principal: Hague
Convention on agency 1978 (few ratifications); Belgian IPL Code: place
where the agent acts
Contract concluded by the agent: Rome-I Reg. applied to relationship
between principal and third party
Whether agent has obligations towards third party: normally country of
residence of the agent
COMMERCIAL AGENCY

Substantive law:
-
EU Directive 653/1986 harmonisation commercial agency (nature,
s.further); does not deal with precontractual duties
-
Non-harmonised questions left to national law. In Belgium the rules in the
new Economic Law Code stemming from the Act of 19-XII-2005 on
precontractual duties to inform now also apply to commercial agency
contracts (requiring a PID - precontractual information document)
-
Unidroit Convention - not in force; model law in DCFR
COMMERCIAL AGENCY

-
-
-
Directive 653/1986:
art. 1 scope of application: intermediary who has continuing authority to
negotiate the sale or the purchase of goods on behalf of a principal (no
services) (with some exceptions in art. 1 and 2)
Art. 3 obligations of the agent: act in good faith, prospect, inform, comply
Art. 4 obligations of the principal: act in good faith, document the goods,
inform expectations, inform about acceptance, pay commission
Art. 5 mandatory character
Art. 7 for which transactions agent entitled to commission (direct, former
customer, area), art. 8 & 9 on transactions after termination
Art. 10-11 further conditions before commission becomes due (performance
by one of the parties; non-performance caused by principal)
Art. 12 quarterly statement of commission; right to information
Art. 13 right to a written contract
COMMERCIAL AGENCY
Directive 653/1986:
Art. 14 Termination of agency for fixed period
Art. 15 Termination of agency for an indefinite period: by notice with a
specific period of time (1 year: 1 month, to 6 years or more: 6 months)
Art. 16 Termination for non-performance or other serious grounds: left to
national law
Art. 17-18 Additional indemnity or compensation:
Indemnity for new customers and for losses, max. 1 year income, further
damages may be proven / or compensation for damage
Not applicable in case of termination for fundamental non-performance or
where the agent terminates without certain justifications
Art. 20 restriction on non-competition clauses
 Is art. 101 TFEU applicable ?
In case of genuine agency (agent does not bear the risk), the restrictions
on the authority of the agent do not fall under Art. 101 TFEU
Restrictions as to the activity of the agent in general fall under art. 101.

COMMERCIAL AGENCY





-
Mandatory nature of these rules
In France, the Act is mandatory but not ‘internationally mandatory’
(overriding): Cass. 28 Nov. 2000.
But: the EU Directive is overriding mandatory law in relation to non-Eu law
(ECJ 9 Nov 2000, C-381/98, Ingmar)
German law: national law is overriding mandatory
Belgian law: idem (Act of April 13, 1995 now integrated in the Economic
Law Code - more protective for the agent than the EU Directive
(‘goldplating’)
ECJ 13 Oct 2013 in C-184/12, Unamar, on the possibility to apply Belgian
law (including restriction on arbitration clauses) where the applicable law is
that of another Member State having also implemented the Agency
Directive: «only if the court before which the case has been brought finds,
on the basis of a detailed assessment, that, in the course of that
transposition, the legislature of the State of the forum held it to be crucial,
in the legal order concerned, to grant the commercial agent protection
going beyond that provided for by that directive, taking account in that
regard of the nature and of the objective of such mandatory provisions»