Selective distribution: the lawful way to choose who sells your product

The problem usually arrives as a message from a distributor: an online reseller nobody has heard of is selling your product, badly presented and cheaply. The reflex is to stop supplying it, and then you discover it never bought from you in the first place. Selective distribution is the structure that makes both the refusal and the recovery possible — the refusal, because a network lets you say who may sell; the recovery, because a network lets you find who leaked. It has to exist before the message arrives, which is the part most brands learn late.

Why a refusal to supply holds inside a network and not outside one

You are free to choose whom you contract with, and there is no European right to be somebody's distributor. A refusal to supply is not unlawful in itself. What turns it into a problem is its reason and its consistency: a refusal that applies a criterion everyone is measured against is a network working as designed, while a refusal that happens to land on the applicant who discounts is a restriction, and the discount is the reason an authority will find when it looks. A company in a dominant position has narrower freedom still. The practical consequence is that the defence of a refusal is written long before the refusal, in the criteria and in the record of how they were applied to everyone else.

What makes a selective network hold

• Criteria written before you need them. Objective, qualitative, knowable in advance, and precise enough that an applicant can read them and work out for itself whether it qualifies. Criteria that only you can interpret are not criteria.
• Criteria proportionate to the product. What justifies demanding a trained salesperson and a demonstration area for a technical or prestige product does not justify it for an ordinary article. The nature of the product is the measure, and it is the measure a judge uses.
• Admission open to whoever satisfies them. This is the heart of it: anyone meeting the criteria gets in. A network that also caps how many members a territory may have is a different and more exposed construction, which can still be sheltered by the block exemption but no longer sits outside the prohibition on its own merits.
• A ban on reselling to resellers outside the network. The clause that makes a network a network. Without it, every member is a lawful door into the parallel market and you have no contractual grip on anything.
• The same seriousness for every channel. Online criteria that mirror the shop criteria, written from the product and not designed to make the online channel impossible. A network whose web criteria are a disguised prohibition loses on the prohibition, not on the network.
• Decisions on paper, at the time. Each application, the criteria it was measured against, the finding, the reason, the date. A reason written later is an argument; a reason written then is evidence.

What makes it fall apart

• Criteria invented after the fact. A requirement that appears in the week you decided to exclude somebody reads as exactly what it is, and the dates are in your own files.
• Application with a geometry of its own. An account too large to be measured against the criteria ends the network. A single tolerated exception answers every future dispute, because the excluded applicant only has to point at it.
• Criteria that are really about price. A requirement whose only practical effect is to prevent discounting is a price clause with a quality vocabulary, and it will be treated as a price clause.
• Criteria nobody can verify. If you cannot say how a requirement was measured, you cannot show you applied it equally, and an unverifiable criterion is read as a pretext.
• A gap between the contract and the sales team. A network written for a court and run on relationships produces two stories, and the other side will find the one that was never meant to be read.

What the network gives you against parallel channels

The only durable tool against grey goods is the obligation not to resell to resellers outside the network, which means you do not act against the unauthorised reseller at all: you find the member that supplied it. Trademark law gives you less than brands expect here. Once goods have been put on the market inside the Union by you or with your consent, your trademark rights in them are exhausted and you cannot use the trademark to stop their resale, except in limited situations such as goods whose condition has been changed or whose presentation has been seriously damaged. Goods first placed on the market outside the Union are a different situation, where the rights are not exhausted and you have considerably more to say.

Which turns the fight against parallel channels into an exercise in bookkeeping and nerve. Bookkeeping, because you can only enforce against the member you can identify: unit codes, batch records, and a register of which member received which batch are what let you say, with a photograph of a listing, where the goods came from. Nerve, because the member that leaks is usually a member that buys well, and terminating it costs you the volume it was taking. A network you never enforce is a document; a network you enforce costs money the day you first use it, and that cost is the price of every refusal you want to make afterwards.

What to settle before you refuse your first applicant

1. Write the criteria from the product rather than from the list of resellers you would like to have, because the second method produces criteria you cannot justify.
2. Decide whether admission is open to all who qualify or capped per territory, and know that the capped version is the more exposed construction.
3. Put the obligation not to resell outside the network into every contract, including those already signed, which means an amendment rather than a memo.
4. Give the online criteria the same seriousness as the shop criteria, and check that a serious online-only applicant could actually satisfy them.
5. Set up the traceability that will let you find a leak: a code on the unit, a record of which member received which batch, kept long enough to be useful.
6. Open an admission file and keep it, with the reason for each decision written on the day it was taken.

Build the network while you still want everybody in it. Criteria written when you have no one to exclude are criteria that come out of the product, and they are the only ones that survive being read by the applicant's lawyer. Then apply them to your largest account as well, because that is the test the whole construction is judged on. And have the criteria and the no-resale clause reviewed by a competition lawyer in the country where your network actually operates: the principles are European, their application is national, and your particular product decides what is proportionate.