• Selective Distribution System under Competition Law
  • February 5, 2016
  • Law Firm: Erdem Erdem Law Office - Istanbul Office
  • Selective Distribution System

    Selective distribution system is defined as a “distribution system whereby the provider undertakes to sell, directly or indirectly, the goods or services that are the subject of the agreement, only to distributors selected by it, based on designated criteria, and whereby such distributors undertake not to sell the goods or services in question to unauthorized distributors,” under Art. 3 of the Block Exemption Communiqué on Vertical Agreement No. 2002/2 (“Communiqué No. 2002/2”).

    Qualification of the goods or services plays a significant role in formation of the selective distribution system. Suppliers who do not prefer to sell products, such as jewelry and perfumeries, with a certain brand image to be sold by personnel with insufficient knowledge and qualifications, at unsuitable places, generally choose the selective distribution system. In order to ensure to supply such products to the end users in the most efficient way, a requirement may be introduced to ensure that the products are exclusively sold by members of the selective distribution system, and to prevent the product from being displayed at sales points that may harm its brand image. As stated in the Guideline on Vertical Agreements (“Guideline”), the selective distributor agreements, as exclusive distributor agreements, limit the number of authorized distributors and resale opportunities, as well.

    When restrictions are imposed by the selective distribution system members for the purpose of protecting the quality of the product, these restrictions are not deemed as a restriction of competition. The criteria to be met in the selective distributor agreements has been examined in the Metro[1] case by the Court of Justice of the European Communities (“CJEC”). As per this dispute, SABA sells products, such as televisions, radios and tapes through a distribution network composed of expert sellers who meet certain criteria. SABA refused Metro’s claim of being a part of this network since Metro does not meet the criteria required by SABA. The Commission of the European Communities granted exemption to SABA’s distribution agreement; thus, Metro applied to the CJEC appealing the decision of the Commission[2].

    Legal Framework of the System under Turkish Competition Law


    Pursuant to Art. 4 of the Act on the Protection of Competition No. 4054 (“Act No. 4054”), agreements between undertakings that have the intent or effect, or likely effect to prevent, distort or restrict competition, are illegal and prohibited. Within this scope, the selective distribution agreements that have the intent or effect, or likely effect to prevent, distort, or restrict competition, are illegal and prohibited, as well.

    If the selective distribution agreements that are included within the scope of Art. 4 of Act No. 4054 meet the exemption conditions stated in Art. 5 of Act No. 4054, the Competition Board (“Board”) may decide to exempt these agreements. Also, these agreements may enjoy block exemption communiqués issued by the Board.

    There are three block exemption communiqués in force that include regulations on selective distribution agreements. These communiqués are as follows: Communiqué No. 2002/2, Block Exemption Communiqué on Vertical Agreements and Concerted Practices in Motor Vehicles Sector No. 2005/4 (“Communiqué No. 2005/4”) and Block Exemption Communiqué on Technology Transfer Agreements No: 2008/2 (“Communiqué No. 2008/2”).

    Selective Distribution Systems within the scope of Communiqué No. 2002/2


    As it is regulated in Art. 4 of Communiqué No. 2002/2, vertical agreements that include limitations and have the intent to hinder competition, directly or indirectly, may not benefit from the exemption. Those that are regulated under Art. 4, and which may not benefit from the block exemption, are related to selective distribution agreements. These are as follows: (i) restriction of active or passive sales to end users, to be performed by the system members operating at the retail level, provided that the right is reserved for prohibiting a system member from operating in a place where it is not authorized, (ii) prevention of purchase and sale between the system members themselves in the selective distribution system.

    In light of the foregoing, even if the supplier creates exclusive regions in order to supply goods to a limited number of purchasers, active and passive sales to be performed by purchasers to the end users outside of the region cannot be prevented. Additionally, enterprises that adopt a selective distribution system cannot impose exclusive purchase obligations to the system member buyers. In other words, the system members cannot be prevented from purchasing products from other member undertakings.

    Accordingly, selective distribution agreements that do not include restrictions listed under Art. 4 of Communiqué No. 2002/2 benefit from the block exemption, without considering the quality of the goods and services and the selection criteria.

    Selective Distribution Systems within the scope of Communiqué No. 2005/4


    Pursuant to Art. 3/f of Communiqué No. 2005/4, a selective distribution system means a distribution system where the provider undertakes to sell the goods or services that are the subject of the agreement only to the distributors or authorized services, directly or indirectly, and where these distributors or authorized services undertaking not to sell the said goods and services to unauthorized distributors and services.

    The supplier may adopt quantitative or qualitative selective distribution system when selecting their distributors or authorized services. A quantitative selective distribution system is a selective distribution system wherein the provider uses criteria that directly limits the number of these distributors or authorized services when selecting its distributors or authorized services. A qualitative selective distribution system is a system where the provider uses criteria for distributors or authorized services, which are only qualitative and are required by the nature of the goods or services that are the subject of the agreement, are established and put forward so as to be the same for all candidate undertakings that apply for participation in the distribution system, are not applied in a discriminatory manner, and which do not directly limit the number of the distributors or authorized services.

    Art. 5 of Communiqué No. 2005/4 regulates restrictions that take the agreements out of block exemptions. Those that are regulated under Art. 5, and which may not benefit from block exemptions, are related to selective distribution agreements. These are as follows: (i) the prevention of exchanges among system members in the selective distribution system, (ii) the restriction of active or passive sales to end users by members of a selective distribution system, (iii) the restriction of sales by members of a selective distribution system to special services.

    Moreover, the restriction of the right of authorized services to sell spare parts to independent undertakings[3], or prevention of access to the technical information, diagnostic devices, and other equipment, required software or education that are necessary for the maintenance and repair of motor vehicles, take the agreement out of the block exemption.

    Selective Distribution Systems within the scope of Communiqué No. 2008/2


    In accordance with Art. 4/f of Communiqué No. 2008/2, selective distribution system is a distribution system where the licensor licenses the production of the contract products only to licensees selected on the basis of specific criteria and where these licensees undertake not to sell the contract products to unauthorized distributors.

    Where undertakings party to the agreement are not competitors, the exemption granted by Communiqué No. 2008/2 shall not apply to the agreements in the event active or passive sales to end users are restricted by a licensee carrying out activities at the retail level without prejudice to the right to prohibit a member of a selective distribution system from carrying out activities at an unauthorized place.

    As per, Guidelines on the Application of Articles 4 and 5 of the Act No. 4054 on the Protection of Competition to Technology Transfer Agreements, in cases particularly where the licensee is obliged to establish a certain type of distribution system such as exclusive distribution or selective distribution according to the license agreement, distribution agreements concluded for the purposes of implementing such obligations must, in order to be covered by a block exemption, comply with Communiqué No. 2002/2.

    Non-compete Obligation in the Selective Distributor Systems

    In accordance with Art. 5 of Communiqué No. 2002/2, the exemption granted shall not be applied to the obligation not to sell the branded product of designated competing providers, as imposed on the members of the selective distribution system.

    Another non-competition obligation practice that is not authorized is the prevention of the sales of a certain competitor's products by the members of a selective distribution system. The supplier of a selective distribution system may mandate that selected buyers sell its own products exclusively, and refrain from selling any competing products. However, it may not allow the sale of the products of some of its competitors while preventing others from using this system. In other words, in a selective distribution system, non-competition obligations must either cover all competing products, or none of them.

    As to Art. 6 of Communiqué No. 2005/4, exemptions shall not apply to any direct or indirect non-compete obligation regulated in agreements in terms of the sale, maintenance and repair services, or spare parts of new motor vehicles.

    Competition Risks Arising From the Selective Distribution System


    As per the Guideline, certain competition risks arise from the selective distribution, such as lessening in inter-brand competition, and particularly, cause a decrease in inter-brand competition, closing of the market to certain types of distributors in the event of cumulative effect, and ensuring cooperation between suppliers and distributors that cause restriction of competition. As well, since distribution systems do not tend to emphasize price competition, some of these systems can be used for the exclusion of re-sale units (such as discount stores) and price competition between brands can be in imperiled in case numerous companies in the market use selective distribution[4]. Also, by selective distribution systems, it may be purposed to hinder competition via preventing a new supplier or distributor from entering into the market, to restrict inter-brand competition by closing of the market to sub-buyers in the market, by the supplier who is in the position of monopoly[5]..

    Positive Effects of the Selective Distribution System


    Some of the positive effects of the selective distribution system may be specified as follows: (i) helping to solve the free-riding problems among the distributors, and keeping pre-sales services at the preferred level, (ii) ensuring decrease in the transportation, logistic and transaction costs due to provision of the products to limited number of distributors, (iii) ensuring effective distribution of the product, (iv) the promotion of distribution services, (v) guaranteeing significant relationship-specific investments, (vi) contributing to consumer satisfaction, (vii) availing sales forecast and production management, etc.[6].

    Conclusion

    Selective distribution agreements have gained importance with Communiqué No. 2002/2, Communiqué No. 2005/4 and Communiqué No. 2008/2. The effects of the selective distribution system, where re-sellers who meet the relevant criteria and the variety of products that are limited may vary due to several factors in competition. The restrictions introduced in selective distribution provide for gaining efficiency in the relevant market on one hand, while on the other hand, they may have negative effects on competition depending on market conditions. Therefore, collectively evaluating the positive and negative effects of the restrictions imposed by the selective distribution on a case-by-case basis is important.



    [1] EuGH, 25.10.1977- Rs. 26/76, Slg. 1977 ”Metro/Saba”, please see. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:61976CJ0026 (Access date: 08.01.2016).

    [2] Uzunalli, Sevilay, Rekabet Hukukuna Göre Daǧitim Anlasmalarinda Internetten Satis Sinirlamalari, p. 7, 8. Please see. http://journal.yasar.edu.tr/wp-content/uploads/2014/01/23-Sevilay-UZUNALLI-1.pdf (Access date: 08.01.2016).

    [3] The independent enterprise should be considered as the independent service.

    [4] Koç, Ali Fuat, AT Rekabet Hukukunda Seçici Daǧitim Anlasmalari, Ankara, 2005, p. 20. Please see. http://www.rekabet.gov.tr/File/?path=ROOT%2F1%2FDocuments%2FUzmanl%25c4%25b1k%2BTezi%2Ftez68.pdf (Access date: 08.01.2016).

    [5] Koç, Ali Fuat, AT Rekabet Hukukunda Seçici Daǧitim Anlasmalari, Ankara, 2005, p. 21. Please see. http://www.rekabet.gov.tr/File/?path=ROOT%2F1%2FDocuments%2FUzmanl%25c4%25b1k%2BTezi%2Ftez68.pdf (Access date: 08.01.2016).

    [6] Koç, Ali Fuat, AT Rekabet Hukukunda Seçici Daǧitim Anlasmalari, Ankara, 2005, p. 27. Please see. http://www.rekabet.gov.tr/File/?path=ROOT%2F1%2FDocuments%2FUzmanl%25c4%25b1k%2BTezi%2Ftez68.pdf (Access date: 08.01.2016).