Distribution agreements Flashcards
(32 cards)
Why distribution agreements ? Distribution v. direct sales (cross-border (incl. own website) or with representative office/establishment)
- Practical reasons - Commercial reasons (eg efficient marketing, use network effects, ..)
- Financial reasons (eg less capital)
- Legal reasons (advantage of a separate entity, etc …)
- I.a. division of risks and profits, management of stocks, ….
- But: conflict agency costs …
FORMS OF DISTRIBUTION
- Sales representative = employee with an employment contract (receives wage plus commission)
- Distributorship (« concessionaire ») or dealership*: distributor itself buys and resells; chooses in principle its price for selling; difference of price is his income
- the term dealer is normally used for distributors that are retailers (selling to the public), whereas distributors are rather wholesalers.
- 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)
- Alternative: platform operator organising P2P contracts (‘sharing economy’)
- Occasional intermediary
- Distribution via online platforms (information society services): in principle, the platform is not concluding the contract, only facilitating dealings between the parties (but: case law on Uber as offering transport servcies and not merely an intermediary)
Important about form
- National law contains protective rules for distributors (dealers) & agents. But sometimes the weaker party is the (small) supplier dealing with big distributors (esp. when the distributor has stipulated exclusivity).
- As to the protection, there are big differences, e.g. agents are protected in all EU MS, distributors only in some (such as Belgium)
- Form is relevant also vicarious liability:
- employer is liable for sales representatives
- principal liable for agents (including agents exceeding their mandate, if apparent agency)
- sometimes even in case of franchising (although franchisee not an agent)
• 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 2015 NLRB rulings in McDonald’s (and in Browning-Ferris, but not a franchising case)) - Or whether the franchisor can be the employer of the franchisee (as in Cass. Fr. 4 Dec 2001)
DISTRIBUTORSHIP
• (Also dealership) 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 (‘dual distribution’) in the territory and/or 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, …
- 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 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:
a) goodwill (remaining to supplier),
b) investments profiting to supplier, and
c) 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)
FRANCHISING
• General characteristics/types
- 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 different degrees: business format franchise, product franchise, manufacturing franchise
- But 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); whether a single establishment or the right to have establishments in a certain are (area developer agreement)
- International franchising can be direct or indirect (with a master franchise and subfranchising)
- 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:
- International models:
- Uncitral Model Franchise Disclosure Law 2002;
- ICC model international franchising contract; DCFR IV E.
- In the USA, federal Franchise rules are made by the FTC
- In the EU: mainly member state law, but see
- infra competition law
- harmonised rules on IP rights
FRANCHISING - Some typical rules in substantive law:
- Many statutes impose on the franchisor a precontractual duty to disclose, often in the form of a PID or DPI (precontractual information document, FDD = Franchise Disclosure Document).
- Eg Belgium (in the Economic law code), France, Sweden, Italy, USA (federal franchise rule by the FTC since 1978, but only administrative sanctions), 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 of the premises)
IP RIGHTS
• Intellectual property rights are ‘territorial monopolies’ (national or multinational). Protection is determined by the law of the territory for which protection is sought (lex loci protectionis, art. 8 I Rome-II-Reg) (for jurisdiction, see Ch. 11)
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 - (inter)national
• Trademarks and Designs:
- « national monopolies » (except Benelux: unitary for 3 countries);
- alternative: Union Trade Mark (EUTM) (until March 2016 Community Trade Mark, now codified in Reg. 2017/1001) and Community Design: unitary and largely autonomous rights. Administered by the EUIPO in Valencia (formerly named OHIM). But many aspects left to national law
- Proprietary aspects (transfer of property, etc.)
- Remedies other than injunction and seizure: law applicable under Rome-II : place where the main act at the origin of the violation is committed (ECJ Sep 2017 in C-24/16, Nintendo)
- 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 - TRIPS
• 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 (7)
• For the purpose of registering trademarks, a classification of goods and services – called NCL (Nice Classification) - is established by the Nice Agreement (1957, amended 1979). The ECJ decided in 2012 that registration of goods or services must be sufficiently precise (not too general a class) (IP translator case C307/10), codified in new Directive.
Trademarks - harmonisation
- Further international harmonisation by the Singapore Trademarks Treaty 2006.
- In the EU:
- National trademark law to a large extent harmonised by EU Directive 2015/2436 (now also harmonising certification trademarks, i.e. collective trademarks by independent certification organisation)
- Unregistered trademarks not protected, unregistered designs enjoy some protection
- « Exhaustion principle »: trademark is limited by EU case law to its specific object > right is in principle exhausted when goods put on the market in the EU with consent of trademark holder, unless an important or unreasonable modification has taken place (art. 15 Reg. 2017/1001, see infra).
• In the US:
- State law
- Supplemented for interstate commerce cases by the federal Trademark Act (Lanham Act)
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 countries can issue refusals of protection within 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 in the EU is affected, EU competition law applies (if not, agreement may still be forbidden under national competition law). Idem for federal US law as soon as interstate commerce in the US is affected.
• Basic rules:
- in EU law: Art. 101 ff. TFEU (formerly 81 EC Treaty). Main instruments: prohibition of cartels (infra); prohibition of abuse of dominant position; concentration control (merger control, Reg. 139/2004)
- similar in US law: Sherman Act 1890 as amended (now in 15 USC)
BASICS OF 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
* incl. where the agreement or concertation is through and with a third party that is not a competitor, see e.g. ECJ C-194/14 Treuhand, C-74/14, Eturas.
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. Evaluation requires detemination of the relevant market (product or service market + geographical market) (see in general Commission Notice C-72 of 1997 on the definition of relevant market)
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 + Directive 2014/104
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.
• Comp. in the US the “rule of reason” applying to agreements or practices unless they are “per se” (inherently and obviously) anticompetitive
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 10 % on any of the relevant markets.
3° in case of network effects*, presumption only for market shares under 5 % each (e.g. distribution of beer) or * A higher number of users makes a platform more attractive for potential new users and indirectly for new developers
- 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. Then no study of effects necessary.
- Notice is not binding for Courts, only for the Commission (ECJ C-226/11, 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 (330/2010)
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.
- > not to agreements between distributors or franchisees among them
- 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 non-competition clauses): (1 a + 2) (1b + 3) (1 c)
- Individual withdrawal of exemption possible by EC Commission (art. 6)
