Distributors: is resale possible without the supplier's agreement?

Many entrepreneurs who want to start distributing branded products wonder whether it is necessary to obtain the agreement of the brand owner (the supplier) and to enter into a distribution contract.

The answer to this question depends on the nature of the product and the distribution method chosen by the supplier.

Selective distribution

In a selective distribution system, distributors must be approved by the brand, based on quantitative and/or qualitative criteria. Therefore, a distributor cannot resell products without being approved by the brand or, if approved by the brand, resell the products to unapproved distributors. Luxury brands, for example, often use this model to control their brand image.

Resales outside the network, when they are made by unauthorized resellers who take advantage of the brand's investments in its network without bearing the costs or providing service to the consumer, are likely to be sanctioned on the basis of tort liability (unfair competition, parasitism, unlawful use of the brand, etc.). This will be the case, for example, if luxury products are resold at the same time as low-end products or under conditions that do not ensure the enhancement required by the brand owner of its authorized distributors.

Exclusive distribution

It is also possible (although less frequent) for brands to use exclusive distribution, and to entrust the distribution of their products to only one distributor, for example a wholesaler, by geographical area (country or territory) or by type of customer. The latter, unlike the selective distributor, has a monopoly on resale in the territory or to the clientele allocated to it by the supplier, except in two cases:

- if the supplier has reserved the right to sell the products in the territory or to the customers in question, and

- if the supplier has opted for an exclusive distribution "shared" between several distributors, as is now allowed by the new vertical exemption regulation of the European Commission[1].

Despite the exclusivity, the exclusive distribution agreement may only prohibit so-called "active" sales by non-exclusive distributors into the exclusive territory or to the exclusive customer group, i.e., sales resulting from the distributor's canvassing of consumers in the exclusive territory or to the exclusive customer group (including, if applicable, via an Internet site). However, the distributor may not prohibit passive sales by other distributors in the exclusive territory or to the exclusive customer group, i.e. sales that are directly initiated by consumer demand. Such a prohibition of passive sales would constitute a hardcore restriction of competition sanctionable by a competition authority.

Open distribution

Only if the distribution model is open, i.e., any distributor has the right to buy and resell the products, can a distributor do without the express agreement of the brand. However, even in this situation, we advise distributors to seek the agreement of the supplier (or its wholesaler) and to conclude a distribution contract in order to define the rights and obligations of each party. Otherwise, the commercial relationship will be based solely on the supplier's general terms and conditions of sale, which reflect the supplier's commercial policy and are naturally very favorable to the supplier.

In any case, and despite the principle of the free negotiability of contracts, there are numerous rules governing distribution contracts (prohibition of cartels and restrictive competition practices, rules concerning payment deadlines or logistics penalties, etc.). In order to avoid pitfalls and to obtain the best contractual conditions, distribution players are advised to have their contracts reviewed and negotiated by a law firm.

[1] Commission Regulation (EU) 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices