Exclusive or selective distribution agreement: how to choose the model suited to your business?

Choosing the right distribution model is a major strategic decision for any supplier, manufacturer or network head wishing to develop the marketing of its products. Between exclusive distribution and selective distribution, the legal, competition and commercial stakes are appreciably different. A poor choice may lead to the invalidation of the network, penalties under competition law or heavy damages litigation where termination has been poorly anticipated.

This article offers a clear overview of the applicable rules, the selection criteria and the contractual best practices to secure your distribution strategy over the long term.

What is an exclusive distribution agreement and how does it work?

The exclusive distribution agreement is a contract by which a supplier undertakes to sell its products or services to a single distributor only, within a defined territory or to a specified customer base. In return, the distributor benefits from territorial protection ensuring the absence of direct competition from other approved resellers in the relevant area.

This model is widely used in sectors such as industrial equipment, the automotive industry, high-end furniture or the distribution of beverages, where the supplier wishes to entrust a local partner with the task of commercially developing the brand while guaranteeing it a return on investment.

What is the legal definition of exclusivity?

French law does not provide a single definition of the exclusive distribution agreement. Its characterisation results from the combination of several texts and case law. Article L330-1 of the Commercial Code nonetheless governs its duration by providing that any exclusive supply clause binding the buyer to its supplier is limited to a maximum of ten years. This rule applies in particular to exclusive supply agreements for identical or complementary products.

Exclusivity may take several forms:

• territorial exclusivity: the supplier refrains from selling itself or through other distributors within the granted territory,
• exclusive supply: the distributor undertakes to source only from the supplier,
• customer exclusivity: the distributor holds an exclusive right over an identified group of customers.

These forms may be combined. The agreement may be unilateral or reciprocal.

What are the reciprocal obligations of the supplier and the exclusive distributor?

The supplier undertakes to respect the exclusive territory, to supply the products under stable conditions and to provide commercial support to its partner. The distributor, for its part, must generally meet sales targets, actively promote the brand, maintain sufficient stock and apply the quality standards set by the supplier.

The agreement must also organise the communication of prices, the handling of customer disputes, the training of sales teams and the conditions of online sales, an issue that has become central since the rise of e-commerce.

What is a selective distribution agreement and what is it intended for?

The selective distribution agreement is a system in which the supplier chooses its resellers on the basis of objective qualitative criteria related to the nature of the product, and requires them to resell only to other approved distributors of the network or to end consumers. No territorial monopoly is granted: several distributors may coexist within the same geographical area provided they meet the selection criteria.

This model is favoured for products whose image, technical nature or after-sales service requirements justify a strict framework for the distribution channel: luxury perfumery, watchmaking, high-end cosmetics, consumer electronics, technical sports goods, wines and spirits.

On what criteria is the selection of distributors based?

For a selective distribution network to be lawful under competition law, the selection criteria must be:

These criteria stem from historic European case law (the Metro I and II and AEG-Telefunken rulings) and are largely incorporated into Regulation (EU) 2022/720 of 10 May 2022 on vertical agreements, as well as its accompanying guidelines.

Which products justify the use of a selective distribution network?

European case law, in particular the Coty Germany ruling handed down by the Court of Justice of the European Union in 2017, confirmed that selective distribution is lawful for luxury products whose image forms an integral part of their value. More broadly, this model is justified for products that are:

• technically complex, requiring specialised advice,
• prestige products whose image must be protected,
• subject to specific regulation (health, safety),
• presenting risks in the event of misuse.

Selective distribution also makes it possible to restrict resale on certain marketplaces that do not comply with quality standards, provided that such restriction does not amount to a general ban on internet sales.

Exclusive distribution and selective distribution

What legal framework governs distribution agreements in France and Europe?

Exclusive and selective distribution agreements fall within a twofold legal framework combining French law and European competition law. Understanding this interplay is essential to avoid pitfalls.

What does French law provide regarding exclusivity clauses?

Several provisions of the Commercial Code structure the French regime governing distribution agreements.

Article L330-1 of the Commercial Code caps at ten years the period of validity of any exclusive supply clause relating to movable property. This rule aims to prevent perpetual commitments that would artificially freeze commercial relationships.

Article L330-3 of the Commercial Code, arising from the Doubin Act of 31 December 1989, imposes a pre-contractual information obligation on any person making available to a partner a trade name, a trademark or a sign, while requiring in return an undertaking of exclusivity or quasi-exclusivity. The pre-contractual information document (DIP) must be provided at least twenty days before signature of the agreement or before any payment of money. It specifies in particular:

• the seniority and experience of the network-head company,
• the state and development prospects of the market,
• the size of the network of operators,
• the duration and the conditions for renewal, termination and assignment of the agreement,
• the extent of the exclusivities granted.

Failure to comply with this obligation may lead to the nullity of the agreement for vitiated consent if the lack of information prevented the distributor from committing on an informed basis.

Articles L420-1 and L420-2 of the Commercial Code prohibit anti-competitive agreements and abuses of dominant position. A distribution network that artificially restricted competition, imposed resale prices or partitioned markets would fall foul of these prohibitions.

Article L442-1 of the Commercial Code penalises a significant imbalance in the rights and obligations of the parties, as well as the abrupt termination of an established commercial relationship. In the event of a dispute over the notice period, the liability of the party initiating the termination cannot be incurred for insufficient notice where it has given eighteen months' notice. This provision is crucial when ending a distribution agreement, particularly where the distributor carried out a substantial part of its business with the supplier.

Article L442-2 of the Commercial Code, for its part, penalises participation in the breach of the prohibition on resale outside the network of a product covered by an exempted selective or exclusive distribution system. This text allows network heads to pursue unauthorised resellers who obtain the products through parallel channels, provided that the network is itself lawful.

What does the European Regulation 2022/720 contribute on vertical restraints?

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, known as the Vertical Block Exemption Regulation (VBER), entered into force on 1 June 2022 for a period of twelve years. It replaces the previous Regulation 330/2010.

This text sets out the conditions under which certain restrictions contained in vertical distribution agreements escape the prohibition on anti-competitive agreements. To benefit from the exemption, several conditions must be met:

• the market share of the supplier and the distributor must not exceed 30 % on the relevant markets,
• the agreement must not contain any hardcore restrictions (in particular the imposition of a fixed or minimum resale price, market sharing between competitors, certain restrictions on online sales),
• the exclusions provided for by the regulation must be complied with.

The 2022 regulation introduced several important novelties, in particular:

• the possibility for the supplier to appoint up to five exclusive distributors within the same territory (shared exclusivity),
• a more precise framing of restrictions on online sales, online advertising and the use of third-party platforms,
• a specific treatment of marketplaces and price comparison websites.

The vertical guidelines published in May 2022 by the European Commission clarify the interpretation to be given to these provisions. They have become an essential reference for the drafting and auditing of distribution agreements.

The interplay between French law and European law therefore calls for constant vigilance: an agreement compliant with domestic law may nonetheless be contrary to European law if the supplier's market share exceeds the thresholds or if certain clauses fall within the category of hardcore restrictions.

How to choose between exclusive distribution and selective distribution?

The choice between the two models cannot be reduced to a legal question. It depends on the commercial strategy, the nature of the product, the level of investment expected from distributors and the brand image the supplier wishes to convey.

Which strategic criteria should guide the decision?

Several questions should be raised before structuring a network:

• What is the commercial complexity of the product? If the sale requires substantial local marketing investment, territorial exclusivity encourages the distributor to commit financially.
• Is the product's image a decisive asset? For a luxury or prestige product, qualitative selection protects the perceived value and the customer experience.
• What geographical coverage is sought? Exclusive distribution imposes limited coverage, whereas selective distribution allows for a denser presence.
• What objectives regarding online sales? Selective distribution offers better control over the presence on marketplaces and over the consistency of online and offline channels.
• What degree of control is sought over the resale price? Neither model allows a fixed or minimum price to be imposed, but recommended or maximum resale prices are possible under certain conditions.

A concrete example: a French manufacturer of high-end cosmetic products wishing to establish itself in Europe will more naturally choose selective distribution, enabling it to approve qualified perfumeries in several countries while prohibiting resale on platforms unsuited to the brand's image. Conversely, a manufacturer of heavy industrial equipment will favour exclusive distribution to entrust the marketing and after-sales service to a single partner per country.

What legal and competition risks should be anticipated?

Several major risks must be anticipated.

The first is the competition risk. A poorly calibrated network may be characterised as an anti-competitive agreement under Article L420-1 of the Commercial Code or Article 101 TFEU. The penalties imposed by the Competition Authority may reach 10 % of the group's worldwide turnover.

The second is the litigation risk linked to termination of the agreement. Case law regularly awards ousted distributors substantial damages for abrupt termination of an established commercial relationship, provided for in Article L442-1 II of the Commercial Code. The amount depends on the duration of the relationship, the lost turnover and any economic dependence of the distributor.

The third is the risk of recharacterisation. A poorly drafted agreement may be recharacterised as a commercial agency agreement within the meaning of Articles L134-1 et seq. of the Commercial Code, giving rise to a termination indemnity that is sometimes substantial, or as a franchise agreement with its own obligations.

Lastly, a criminal risk exists in the event of a breach of the rules relating to pricing transparency or restrictive competition practices.

Exclusive distribution or selective distribution

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Model 1

Exclusive distribution

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Selective distribution

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What essential clauses should appear in a distribution agreement?

Whatever the model chosen, the quality of the contractual drafting determines the legal security of the network. Several clauses warrant particular attention.

How to secure the duration and the termination conditions of the agreement?

The duration of the agreement must be clearly defined. The choice between a fixed term and an indefinite term has significant consequences:

• an indefinite term allows the agreement to be ended at any time, subject to sufficient notice. It is more flexible but exposes the parties to an increased risk of dispute over the notice period,
• a fixed term provides visibility to both parties but may give rise to litigation if the agreement is terminated before its expiry without legitimate grounds,
• a renewal mechanism by tacit renewal may be provided for, with explicit notice to oppose it.

The termination arrangements must be detailed: grounds justifying termination for breach, length of notice, consequences for remaining stock, the fate of commercial data, post-contractual non-compete clause. The latter, where provided for, must be limited in time, in scope and in its subject matter in order to be valid. European Regulation 2022/720 furthermore limits the duration of post-contractual non-compete clauses to one year.

Anticipating termination is essential. Case law considers that notice must enable the distributor to find an equivalent business. For long-standing relationships, notice periods of twelve to twenty-four months are frequently required.

What pre-contractual precautions are required (Doubin Act)?

Where the agreement includes an undertaking of exclusivity or quasi-exclusivity associated with the making available of a trademark or a sign, Article L330-3 of the Commercial Code requires the provision of a pre-contractual information document (DIP) at least twenty days before signature.

The DIP must include:

• the contact details and experience of the network head,
• the general and local state of the market,
• the list of network members,
• the annual accounts for the last two financial years,
• the nature and duration of the exclusivities granted,
• the financial conditions of the agreement.

An incomplete or inaccurate DIP may lead to the nullity of the agreement. Case law is particularly attentive to the truthfulness of the information provided, notably regarding market prospects and projected profitability. Several decisions have annulled agreements on the ground that the financial projections communicated were unrealistic or misleading.

Other precautions are advisable, though not mandatory:

• verifying the financial soundness of the candidate distributor,
• signing a confidentiality agreement prior to discussions,
• maintaining a written record of negotiations to prevent subsequent disputes.

How does Cabinet Mirabile Avocat support businesses in their distribution choices?

Cabinet Mirabile Avocat supports suppliers, distributors and network heads at every stage of their distribution strategy, in France and internationally.

The firm's work covers in particular:

• the audit of the commercial strategy and the analysis of the relevance of each model in light of the client's objectives,
• the drafting of the pre-contractual information document in accordance with the Doubin Act,
• the tailored drafting of agreements for exclusive and selective distribution, including operational annexes, the quality specifications and clauses specific to e-commerce,
• the compliance audit of existing networks in light of European Regulation 2022/720 and the 2022 vertical guidelines,
• support during negotiations with distributors or suppliers,
• the handling of disputes relating to the termination of agreements, unfair competition or resale outside the network,
• the defence before the Competition Authority in the event of an investigation or contentious proceedings,
• the setting up of internal procedures for selecting distributors and managing the network, in order to ensure non-discrimination and traceability of decisions.

The firm also intervenes upstream, when the company is still hesitating between several schemes (exclusive distribution, selective distribution, franchise, commercial agent, branch). The comparative analysis makes it possible to steer the choice towards the model best suited to the nature of the product, the maturity of the market and the company's resources.

Legal disclaimer

This article is intended strictly for informational and educational purposes. It does not constitute personalised legal advice and cannot replace the analysis of a lawyer in light of the particular situation of each business. The rules applicable in distribution law change regularly, in particular under the influence of European competition law and case law. For any concrete decision relating to the structuring of a distribution network, the drafting of an agreement or the handling of a dispute, it is strongly recommended to consult a specialised lawyer.